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Jun 23, 2020 | Jeremy Goldfarb


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A well known financial planning strategy in the high income world is going to see some benefit from today's low interest rates. The Prescribed Rate Loan strategy allows a high income earning individual to shift some of their tax burden to lower income earners within the same family unit. The rate will be reduced from 2% to 1%, so it is advisable that those with a 2% rate in place " reset" that rate to the lower level. The rate remains in place for the life of the loan regardless of whether the posted rate jumps in the future. 

 

This can be accomplished by way of direct loan to a lower income spouse, or through a family trust allowing for income to split down to children (for certain items). There are required elements in this strategy that need to be in place in order for a household to take advantage of it. There must be a high income earner, and lower income earner,  a non-registered (or taxable) investment portfolio in the high income earners name, and preferably the portfolio does not have a high level of unrealized capital gains. 

 

The high income earner "loans" the funds in the portfolio as cash over to the low income earner at the prescribed rate. As mentioned previously, the rate is set for life. The lower income earner invests the proceeds of the loan in order to generate returns. The "borrower" must pay the lender interest at the prescribed rate annually (payment must be made before the end of January in each calendar year (following), and that payment can be used as a deduction for tax purposes. The portfolio returns are taxable in the hands of the investor, and in this case it is the lower income earner in the household. The tax on those gains are applied to the lower income earner, thus shifting the tax burden to a lower rate payer.

 

If you want to know if this strategy applies to you, I would recommend speaking with us, or contacting your tax professional. 

 

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