Refinancing Prescribed-Rate Loans Used For Income Splitting

Co-authored by Vincent Didkovsky (Newport Private Wealth) in Canadian Tax Focus

 The prescribed interest rate for the purpose of attributing income on low- and no-interest loans has fallen to 1 percent for the third quarter of 2020. This compares to the previous rate of 2 percent, which has prevailed since April 1, 2018. The new rate of 1 percent is the lowest the rate can possibly go under regulation 4301 (unless the yield on government of Canada treasury bills becomes zero or negative). Accordingly, many practitioners are likely to consider whether loans in place at higher prescribed interest rates can be refinanced and locked in at the lower 1 percent prescribed rate. Unfortunately, the process required to make a refinancing strategy effective may be complex and costly and would also likely require a disposition of the income-producing property acquired with the loan. As a result, the tax benefits of the lower-prescribed-rate loan should be weighed against the