Income splitting with my parents

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Dec 27th, 2020 10:29 pm

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Dec 27th, 2020 3:59 pm

mikehd [OP]: Newbie; Dec 25, 2017; 14 posts; 8 upvotes

Dec 27th, 2020 3:59 pm

Income splitting with my parents

Hi all,

I'm running a Smith Maneuver and I am trying to work out a way to minimize tax. I heard about the CRA's Income Attribution Rule and the minimum interest that a loan must charge so that any investment income / capital is attributed to the receiver rather than the lender.

Here's my situation:

I have $100k from the revolving portion of my HELOC at 3% interest rate
My parents are not eligible for any social assistance due to them being in the financial guarantee period of a sponsorship application.
My marginal tax rate is 30% (so capital gain is taxable at 15%)

What I am thinking is to withdraw money from my HELOC (at 3%) and loan it out to my parents at 5%. I declare the 2% difference on my income and my parents declare any investment income and capital gain / loss.

Is this a workable and legal arrangement?

11 replies

Dec 27th, 2020 4:45 pm

M8Rxmjsik: Deal Addict; Jan 30, 2012; 1549 posts; 903 upvotes; TORONTO

Dec 27th, 2020 4:45 pm

mikehd wrote: ↑I heard about the CRA's Income Attribution Rule and the minimum interest that a loan must charge so that any investment income / capital is attributed to the receiver rather than the lender.
...snip...
What I am thinking is to withdraw money from my HELOC (at 3%) and loan it out to my parents at 5%. I declare the 2% difference on my income and my parents declare any investment income and capital gain / loss.

The CRA prescribed rate is currently 1% - you can loan money to your parents at your cost (3%) without triggering attribution rules.

https://www.advisor.ca/tax/income-split ... nal-loans/

+2

Dec 27th, 2020 6:24 pm

mikehd [OP]: Newbie; Dec 25, 2017; 14 posts; 8 upvotes

Dec 27th, 2020 6:24 pm

If I can do that, super. I need to talk to a tax adviser to legal clear it

+1

Dec 27th, 2020 7:30 pm

fkungery: Member; Mar 26, 2012; 402 posts; 258 upvotes

Dec 27th, 2020 7:30 pm

My thoughts:
a) You may need to loan to your parents at 3.01% if your borrow rate is 3% and if u want to deduct your borrowing cost. Sections 18 & 20(1)(c) of the income tax act state that the deductibility requires your borrowing to be used to earn income.

b) There is no guarantee that the investments of your parents will generate 3.01% plus returns. If these investments suffer losses, your parents do not have other income to offset them. I know that the stock mkt has been good since April this year, but past performance does not guarantee future performance.

Dec 27th, 2020 7:36 pm

WetCoastGuy: Deal Addict; Dec 24, 2007; 1501 posts; 1755 upvotes; BC

Dec 27th, 2020 7:36 pm

Huh??

That's not how the rules on Income Attribution works, the rules:

1. only applies between spouses and child under 18 who is not at arm's length to the person transferring the property
2. only applies on property that earns income (like stock and bonds) that is transferred to one of those persons in #1.

So what property are you transferring. Cash transferred does not count as it doesn't earn property income.

So really don't know what you're trying to do ?

+1

Dec 27th, 2020 7:44 pm

ml88888888: Deal Addict; Jan 19, 2017; 4433 posts; 2572 upvotes

Dec 27th, 2020 7:44 pm

WetCoastGuy wrote: ↑ Huh??

That's not how the rules on Income Attribution works, the rules:

1. only applies between spouses and child under 18 who is not at arm's length to the person transferring the property
2. only applies on property that earns income (like stock and bonds) that is transferred to one of those persons in #1.

So what property are you transferring. Cash transferred does not count as it doesn't earn property income.

So really don't know what you're trying to do - i.e. claim a 3% interest deduction and not report the 5% income earned? Then who does report the income as your Parents are borrowing the money and have an expense.

I think the poster is thinking the parents can make more than 5% from the investment so they can write off the 5% cost charged by the child.

Dec 27th, 2020 7:52 pm

fkungery: Member; Mar 26, 2012; 402 posts; 258 upvotes

Dec 27th, 2020 7:52 pm

WetCoastGuy wrote: ↑ Huh??

That's not how the rules on Income Attribution works, the rules:

1. only applies between spouses and child under 18 who is not at arm's length to the person transferring the property
2. only applies on property that earns income (like stock and bonds) that is transferred to one of those persons in #1.

So what property are you transferring. Cash transferred does not count as it doesn't earn property income.

So really don't know what you're trying to do ?

I do think that cash constitute property, and the interest the cash earns for his parents constitutes property income. On the other hand, i do agree that the attribution rules would not apply to his case because the rules apply to transfers between parents and minors or husband and wife, and dont apply to transfer between adults (adult son and parents)

Dec 27th, 2020 8:01 pm

WetCoastGuy: Deal Addict; Dec 24, 2007; 1501 posts; 1755 upvotes; BC

Dec 27th, 2020 8:01 pm

fkungery wrote: ↑ I do think that cash constitute property, and the interest the cash earns for his parents constitutes property income.

I agree that cash is property but cash on its own does not earn any income.

If he invested his cash in stocks or bond - those would earn property income as interest or dividends.

Dec 27th, 2020 9:04 pm

KyleTO: Newbie; Jul 8, 2018; 57 posts; 47 upvotes; GTA

Dec 27th, 2020 9:04 pm

If what's being described is loaning the parents money and the parents keep the gains and only repay the original principal, that's fine.

If what's being described is "loaning" the parents money and the parents invest the money on behalf of the poster, that's tax evasion.

+2

Dec 27th, 2020 9:18 pm

DaveTheDude: Deal Addict; Mar 3, 2018; 1976 posts; 1980 upvotes; GTA

Dec 27th, 2020 9:18 pm

WetCoastGuy wrote: ↑ Huh??

That's not how the rules on Income Attribution works, the rules:

1. only applies between spouses and child under 18 who is not at arm's length to the person transferring the property
2. only applies on property that earns income (like stock and bonds) that is transferred to one of those persons in #1.

Attribution rules can apply between non-arms length adults where property is loaned at low or at no interest rate. The income/loss is attributable but not capital gains/losses. In this case though the OP would be fine as he is loaning to a related party at an interest rate that gives him a return.

Dec 27th, 2020 9:30 pm

peelhic: Deal Addict; Aug 20, 2007; 1928 posts; 694 upvotes; Kitchener

Dec 27th, 2020 9:30 pm

Do your parents have any income? If not then the CRA will question the validity of the loan from you to them. The CRA will want to ensure that there are clear payments being made on the loan to validate that the parents can then claim the return from the investments at their lower marginal tax rate. Other wise as per previous poster, this will be considered tax evasion.

Dec 27th, 2020 10:29 pm

fogetmylogin: Deal Addict; Nov 13, 2013; 2579 posts; 1305 upvotes; Ottawa

Dec 27th, 2020 10:29 pm

30% tax bracket?!? Don’t you have better things to do, like I don’t know increase your income rather than look for some silver bullet tax savings scheme ?

I know you imagine you go back to 2018 or 15 whatever. Lend your parents money. You make a nice profit and they invest in a FANG stock and make 20% a year which you inherit tax free in 20 years. Tax avoidance aside. Just as likely market turns and you have a HELOC that eats into your equity and they can’t pay you back.

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