Tax Insights: Taxable benefit rate rising to 2%

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Act before October 1, 2013

Issue 2013-11

The federal prescribed interest rate for taxable benefits will increase to 2% on October 1, 2013. The rate – which is subject to change every quarter – has been 1% since April 1, 2009. To lock in the 1% rate and save tax, you must act before October 1, 2013.

A low prescribed interest rate for taxable benefits can provide tax saving opportunities for you or your family, if you will be:

  • participating in or refinancing a family income-splitting loan arrangement, or
  • taking out or replacing an employee home purchase loan

The 1% prescribed rate means that this is a good time to make a loan bearing interest at 1% to a low-income spouse and/or other adult family member who will invest the funds.

This splits income, because income earned on the investment exceeding the 1% interest charge can be taxable to the low-income family member at his or her lower tax rate. Normally, this income (including interest, dividends and certain other types of investment income, and capital gains in the case of a spousal loan) would be ‘attributed’ to the lender and included in his or her income, rather than the borrower’s income, for tax purposes.