Principal Issues: Can the current low prescribed rate be locked in for a long period of time for the purposes of 74.5?
Position: Yes
Reasons: The interest rate is set at the time of the transfer of property.
2013 STEP CANADA ROUNDTABLE, June 10 & 11, 2013
QUESTION 2. Prescribed Rate Loan
The prescribed rate of interest is currently 1%, which is the lowest that it reasonably can be. As a result, it is advantageous to make a loan at the prescribed interest rate to other family members (for example a spouse) such that income on the funds can be earned in the hands of that spouse (pursuant to the provisions of subsections 74.5(1) and (2)). The payment of 1% interest to the transferor should give rise to a deduction to the transferee, which may be an acceptable arrangement given the potential for the spouse (who is presumably at a lower income tax rate) to earn additional income. Our question concerns the terms of the loan at a fixed interest rate (say 1%). Can the 1% interest rate remain fixed where firstly the loan is a demand loan with no term, and secondly the loan is a term loan, with a term of say 20 years? In these cases, does CRA accept that this is a prescribed rate loan, which will not cause income attribution to arise?
CRA Response
Income and gains will not be attributed to the transferor (pursuant to subsections 74.1(1) and (2), and section 74.2) if the loan is set at the prescribed rate "Â…at the time the indebtedness was incurredÂ…" as stated in subsections 74.5(1) and 74.5(2).
2013-048027
Doug Watson