To ensure that the prescribed rate loan you made to a spouse or a family trust continues to meet the requirements to split income, the required annual interest payment must be made to you by January 30th of the following year. If the annual interest payment is not made by January 30th, the attribution rules may be triggered for that particular year and every subsequent year that the loan is in place, effectively defeating your ability to income split. Read more

 

The attribution rules

 

There are attribution rules designed to prevent family income splitting in certain circumstances. For example, if you transfer assets directly to your spouse, then interest, dividends and capital gains derived from those assets may be attributed back to you and taxed in your hands. Similarly, if you transfer the assets indirectly to your spouse, for example, through a family trust, the income and capital gains paid out or made payable to your spouse may be attributed back to you.

 

In addition, if you transfer assets to a trust for the benefit of your minor child (including your niece or nephew), then interest and dividends derived from those assets and paid out or made payable to the beneficiaries will be attributed back to you, effectively defeating your ability to income split.

 

There are exceptions to the attribution rules. One exception is where you loan money at the Canada Revenue Agency’s (CRA) prescribed interest rate in effect at the time the loan was made, instead of simply transferring the assets to your spouse or trust. To ensure that the income earned is not attributed back to you, the interest on the loan must be paid by January 30th of the following year (and by January 30th of every subsequent year that the loan is in place). It is crucial to meet this deadline, because if the interest payment is late by even one day, the attribution rules will apply for that particular year, and all subsequent years, until the loan is repaid. Read more

 

Making the interest payment

 

Where you made a loan to your spouse, your spouse should pay you the interest either by writing a cheque to you or by transferring the funds from their sole account to your sole account. The use of joint accounts may be problematic as your spouse would need to clearly demonstrate that the interest payment is made using their own funds. Your spouse should also document that the payment is for interest owed on the loan for the relevant tax year. Read more

 

Tax reporting for interest paid and received

 

If you lent money to a family trust, the trustee may need to file an annual T5 information return to report the interest paid to you, the lender, and provide you with a T5 slip detailing the interest paid. You are required to include the interest received or receivable on your income tax return. The timing of the income inclusion depends on the year the interest is related to, when the interest is paid and the method (cash vs. accrual) you regularly follow in computing your income. Read more