Low Interest Rate Loans
In today’s low interest rate environment, there is growing opportunity to reduce your tax burden by splitting income among family members. Our tax experts are able to identify such opportunities.
We were recently approached by a 65 year old client who had $40M worth of non-registered investments, earning him an annual return of $2M. He was paying $800k- in tax on this investment, leaving him with 1.2M.
Our client was also paying for his four grandchildren’s private school tuition, a grand total of $80K a year ($20K per child). Due to the fact he was paying these tuition expenses on behalf of his grandchildren, we recognized a more beneficial way in which these payments could be made. Rather than withdrawing from his personal after-tax funds, we were able to shift the amounts so that the taxes were borne by the grandchildren who had no other income.
RMT devised a plan in which a trust was set up for the direct benefit of his grandchildren. Our client then lent that trust $2M at an interest rate of 1% per annum*. The trust then turned around and invested the $2M, earning a 5% return that resulted in $100K of annual investment income. The trust pays $20K as interest to our client on the $2M, and pays the remaining $80K in school tuition.
As a results of the trust and loan, rather than paying $800K in tax, he paid $770K in taxes on the remaining $38M in non-registered investments, including the $20K in interest earned on the loan. Each grandchild reports $20K in income in order to account for the trust paying their tuition. The grandchildren have no taxes to pay in this situation, as they had no other income.
As a result of our set up, our client has saved $30K in taxes on an annual basis.
(*This rate is set by Canada Revenue Agency and does not vary once you make the loan)