Today’s unprecedented economic environment offers some unique tax strategies that you may want to consider if it fits your situation: Kim Parlee speaks with Tannis Dawson, a High Net Worth Planner at TD Wealth, about the new prescribed loan rate and how couples may be able to take advantage of it.
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- Hello, and welcome to the Money Talk COVID-19 Daily Bulletin for Tuesday, May 26. I'm Anthony Okolie. In a few minutes, Kim Parlee will be speaking with Tannis Dawson, High Net Worth Planner with TD Wealth, about how to make the most out of spousal loans as interest rates decline. But first, a quick wrap of today's headlines.
China is demanding the Canadian government release Huawei's chief financial officer ahead of a Canadian court's ruling on her extradition to the US, where she faces charges of bank fraud. Bank of Nova Scotia's profits sank roughly 40%, but still managed to exceed expectations in its second quarter as credit loss provisions doubled amid the COVID-19 pandemic.
Another blow for the battered airline industry. LATAM Airlines, South America's biggest carrier, is seeking chapter 11 bankruptcy protection, the latest airline to suffer from a sharp drop in travel. And finally, the New York Stock Exchange reopened its trading floor Tuesday with only about 25% of the normal trader workforce back. The exchange moved to all electronic trading about two months ago due to the coronavirus pandemic.
And now Kim Parlee's conversation with Tannis Dawson.
- Interest rates have come down as a response to the damage COVID-19 has done to the economy, and that has trickled out into some interesting areas. In this edition of Ask Money Talk, you'll find out if a lower loan rate could save you money in taxes, especially if you're loaning money between spouses. Tannis Dawson is standing by in Winnipeg.
Tannis, the question is, the CRA prescribed loan is being reduced to 1% on July 1. First, what is that, and second, how can we benefit?
- So a prescribed rate loan is one of the few planning opportunities that we have to income split with other spouses or actually family members, but I'll talk mostly about spouses. And so it is allowed by CRA, and so it is a set income-splitting opportunity. And so what that is is that one spouse could be in a higher tax rate.
So we're looking at if a spouse has investment income and has investments that are a lot-- more liquid in cash, that's easier to cash out, and also that they're in a higher tax rate than their spouse. And so what that allows us to do is, right now, the annual investment income that's earned on the investments that that spouse has is on their tax return at their marginal rate. So we have the ability to loan money over to the spouse that has a lower tax rate or maybe no income at all. We loan the money over to that spouse, and CRA has a set rate. So currently, it's 2%. It's going to 1% July 1. So that's exciting because it's giving us this opportunity.
And so what that means is that they just have to charge a 1% interest. So if I have $1 million and I can loan that $1 million over to the other spouse, now my investment income is only 1% of that. And so I have-- that interest rate is set, and so that income is set. So the spouse with the lower income will then have the investment income that's earned on that $1 million on their tax return. And so then they'll have an expense for the 1% of the interest paid over. So we're kind of shifting investment income from one spouse to the other and getting that lower tax rate.
- Let me ask you. And correct me if I'm wrong. This 1% rate, it's never been lower. This is the lowest it's ever been. Is that correct?
- Yeah, we've never had a lower rate than 1%. And even at the 1%, it's very few times that we've ever hit it. So a couple of years back, we were at 1% for a short period of time, and then it went back up to 2%. And the key, or the really exciting, news on this is that once you set this loan in place, it's 1% for the rest of their life. It's set.
So if the rate goes back up to 2%, the loan rate on this loan is 1%. So it is a formal loan. It needs some formal documentation. It's not that you just enter it and say-- it's a promissory note. It is written. It's wet signature on it. It's signed. And it says that, at any point in time, that I can ask for that loan back, or they can pay it back at any point in time. It's not locked in. And we need that to show that it truly is.
We also need that there's actual physical money that transfers from one spouse to another from their account into the spouse's account. And then the other key point is by every January, by January 30, that the interest has to be paid. So if that interest is not paid by January 30, we will put that loan offside, and we can never fix it. So we'd have to collapse it.
- One last question for you, Tannis. For those people who are locked in right now at a higher rate, is there any way to get that lower rate right now?
- So yes. What they'd have to do, though, is they'd have to sell their investments, pay off the loan, and then they can take out a new loan. And usually, what they suggest is the new loan is at a little bit different amount. So it's not that it's the exact same amount, because you don't want to be seen as the same loan. So that's the key. So right now, if the market's low, it might be a good time to do that, because the gain on the investments might not be high, and then tax costs won't be as great.
- Great insight as always, Tannis. Thanks so much.
- You're welcome. Thanks again for having me.
[MUSIC PLAYING]
- Hello, and welcome to the Money Talk COVID-19 Daily Bulletin for Tuesday, May 26. I'm Anthony Okolie. In a few minutes, Kim Parlee will be speaking with Tannis Dawson, High Net Worth Planner with TD Wealth, about how to make the most out of spousal loans as interest rates decline. But first, a quick wrap of today's headlines.
China is demanding the Canadian government release Huawei's chief financial officer ahead of a Canadian court's ruling on her extradition to the US, where she faces charges of bank fraud. Bank of Nova Scotia's profits sank roughly 40%, but still managed to exceed expectations in its second quarter as credit loss provisions doubled amid the COVID-19 pandemic.
Another blow for the battered airline industry. LATAM Airlines, South America's biggest carrier, is seeking chapter 11 bankruptcy protection, the latest airline to suffer from a sharp drop in travel. And finally, the New York Stock Exchange reopened its trading floor Tuesday with only about 25% of the normal trader workforce back. The exchange moved to all electronic trading about two months ago due to the coronavirus pandemic.
And now Kim Parlee's conversation with Tannis Dawson.
- Interest rates have come down as a response to the damage COVID-19 has done to the economy, and that has trickled out into some interesting areas. In this edition of Ask Money Talk, you'll find out if a lower loan rate could save you money in taxes, especially if you're loaning money between spouses. Tannis Dawson is standing by in Winnipeg.
Tannis, the question is, the CRA prescribed loan is being reduced to 1% on July 1. First, what is that, and second, how can we benefit?
- So a prescribed rate loan is one of the few planning opportunities that we have to income split with other spouses or actually family members, but I'll talk mostly about spouses. And so it is allowed by CRA, and so it is a set income-splitting opportunity. And so what that is is that one spouse could be in a higher tax rate.
So we're looking at if a spouse has investment income and has investments that are a lot-- more liquid in cash, that's easier to cash out, and also that they're in a higher tax rate than their spouse. And so what that allows us to do is, right now, the annual investment income that's earned on the investments that that spouse has is on their tax return at their marginal rate. So we have the ability to loan money over to the spouse that has a lower tax rate or maybe no income at all. We loan the money over to that spouse, and CRA has a set rate. So currently, it's 2%. It's going to 1% July 1. So that's exciting because it's giving us this opportunity.
And so what that means is that they just have to charge a 1% interest. So if I have $1 million and I can loan that $1 million over to the other spouse, now my investment income is only 1% of that. And so I have-- that interest rate is set, and so that income is set. So the spouse with the lower income will then have the investment income that's earned on that $1 million on their tax return. And so then they'll have an expense for the 1% of the interest paid over. So we're kind of shifting investment income from one spouse to the other and getting that lower tax rate.
- Let me ask you. And correct me if I'm wrong. This 1% rate, it's never been lower. This is the lowest it's ever been. Is that correct?
- Yeah, we've never had a lower rate than 1%. And even at the 1%, it's very few times that we've ever hit it. So a couple of years back, we were at 1% for a short period of time, and then it went back up to 2%. And the key, or the really exciting, news on this is that once you set this loan in place, it's 1% for the rest of their life. It's set.
So if the rate goes back up to 2%, the loan rate on this loan is 1%. So it is a formal loan. It needs some formal documentation. It's not that you just enter it and say-- it's a promissory note. It is written. It's wet signature on it. It's signed. And it says that, at any point in time, that I can ask for that loan back, or they can pay it back at any point in time. It's not locked in. And we need that to show that it truly is.
We also need that there's actual physical money that transfers from one spouse to another from their account into the spouse's account. And then the other key point is by every January, by January 30, that the interest has to be paid. So if that interest is not paid by January 30, we will put that loan offside, and we can never fix it. So we'd have to collapse it.
- One last question for you, Tannis. For those people who are locked in right now at a higher rate, is there any way to get that lower rate right now?
- So yes. What they'd have to do, though, is they'd have to sell their investments, pay off the loan, and then they can take out a new loan. And usually, what they suggest is the new loan is at a little bit different amount. So it's not that it's the exact same amount, because you don't want to be seen as the same loan. So that's the key. So right now, if the market's low, it might be a good time to do that, because the gain on the investments might not be high, and then tax costs won't be as great.
- Great insight as always, Tannis. Thanks so much.
- You're welcome. Thanks again for having me.
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