This is the new Globe Advisor weekly newsletter for professional financial advisors, published every Friday. If someone has forwarded this newsletter to you via e-mail, or you’re reading this on the web, you can register for Globe Advisor, then sign up for this newsletter and others on our newsletter sign-up page.
Advisors are urging more clients to consider prescribed-rate loans before the rock-bottom rate rises, possibly as early as July 1.
The prescribed-rate loan is an income-splitting strategy in which a spouse with a higher income lends money to a spouse with a lower income to decrease their collective tax bills. The money is loaned at the Canada Revenue Agency’s (CRA) “prescribed interest rate,” which is currently 1 per cent – the lowest rate available. It has been at that level since the third quarter of 2020, when it was reduced from 2 per cent.
The prescribed rate is set each quarter based on the average 90-day Government of Canada T-bill rate auctioned for the first month of the last quarter. Given that average was 1.2 per cent for April, the rate is expected to rise to 2 per cent.
Laura Barclay, senior portfolio manager at TD Wealth Private Investment Counsel Inc. in Markham, Ont., says the window is closing for families to take advantage of the lower rate.
“We know we’re good until June 30,” she says. “The risk is where we will be for July 1.”
Ms. Barclay says tax season is a good time to set up these loans as the number crunching can often present various income-splitting options.
“If we have one spouse who’s a high earner and one spouse is a lower earner, we want the assets generating the investment income to be landing with the lower-income spouse – and the way to do that is through the prescribed-rate loan structure,” she says.
Another reason to do it now before the rate rises is because the percentage is locked in for the life of the loan, Ms. Barclay says, regardless of any changes in the prescribed interest rate announced later.
She adds the loans can also be undone if needed. Once the loan is in place, the lending spouse transfers the funds to the borrowing spouse through a promissory note.
Ms. Barclay says the loan should be properly documented, including interest payments, to comply with CRA rules.
While borrowed funds don’t necessarily need to be invested in the market right away, she says it’s the best way to achieve income splitting and tax minimization.
The interest payments on the prescribed-rate loans are paid at least annually on or before Jan. 30, and the loan interest paid must be included in the lender’s taxable income.
Ms. Barclay says the strategy also works when splitting income with minor children, with the borrower being the family trust.
- Brenda Bouw, special to the Globe and Mail
Must-reads from Globe Advisor this week
Don’t let math mess with your CPP benefits
Deferring your Canada Pension Plan (CPP) payments to age 70 offers the enticing advantage of 42 per cent more money each month, but how long will it take to make up for the payments missed in those five years from age 65? Taxes and other considerations can eat into the payout when you start to receive them. Neil Gross of Component Strategies breaks down whether playing the long game of pension deferral is really a good idea.
The rise of ‘finfluencers’ and its impact on financial planning
From investing and cryptocurrency forums on Reddit to TikTok influencers who combine personal finance content with catchy dance routines, financial advice has exploded on social media – and young Canadians are taking notice. While financial influencers also known as “finfluencers” are helping young investors develop confidence, there are dangers stemming from only seeing investing wins and not losses. Kelsey Rolfe weighs the pros and cons of this growing trend.
How the new home buying account can be used for investment
The Tax-Free First Home Savings Account (FHSA) announced in the federal budget fills a gap between registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) because it offers the benefits of a tax deduction and tax-free withdrawals. That, in turn, should result in more accessible cash for first-time homebuyers. But if investors don’t use that money to purchase a home, there are other gains from using the account. Renee Sylvestre-Williams looks into the investment strategies.
How to navigate Canada’s ‘worst ever’ bond selloff
A combined threat of rising inflation and higher interest rates is forcing a “secular change” in the bond market, according to experts. That’s setting the stage for an unprecedented second year of declines in the Canadian bond universe. Jameson Berkow reports on the strategies that investors could deploy to weather the volatility in the market and why active fixed income management has become critical.
Also see:
Investors weigh long-term impact of Ukraine war with no end in sight
Key strategies from some of Canada’s top advisors for this tax season
How Ontario’s new title rule opens the door for nationwide standards
First combined gold-bitcoin ETP launches in Europe
China pension reforms lure international investors
What you and your clients need to know
Critics slam approval of group to certify advisors
Investor advocates are criticizing Ontario’s financial regulator for approving an industry association for financial professionals as one of the organizations whose certifications will allow people to use the titles “financial advisor” and “financial planner.” Advocates say the group doesn’t have enough of a track record of oversight. Clare O’Hara reports on why conflict of interest is a big issue.
Can the pandemic wealth boom blow up?
Government and central banks globally took exceptional measures to support the financial system during the pandemic and lots of money was made in stocks, housing, cryptocurrency and more. But now that the pandemic has settled to a point at which we can mostly live a normal existence, the financial world is heading into a period of disruption that hasn’t been since the 1980s or 1990s. Rob Carrick looks at what comes next and how much will it hurt.
Are Canadian bank dividends sage going forward?
If we’re heading into recession at some point, bank loan losses often seem to rise in this scenario and their stocks take a hit. What should investors focus on in the near future with the risks lurking ahead? John Heinzl discusses why focusing on the long term is a better bet in the current environment and where the opportunities are.
Five moves for mortgage holders close to the financial edge
With rampant inflation, rocketing interest rates and escalating home price risk, it’s vital to understand homeowners’ cash flow stability. Assuming selling to downsize or rent is not an option, there are some pre-emptive steps that a mortgagor can take to strengthen their position as a debt holder. Robert McLister looks at strategies available and how to utilize them effectively.
- Globe Advisor Staff