From: AlanBaggett@volcanomail.com   
      
   Love And Taxes : CRA SOTW   
      
   Article by Samantha Prasad    
   Minden Gross LLP   
      
   The loan manoeuvre and swap rule are strategies that get income into the right   
   hands   
   One of the most common questions I get asked is: what strategies are available   
   to get income into a low-tax rate spouse's hands?   
      
   If your spouse earns less income or no income at all, then it may be possible   
   to double up on the graduated tax rates. However, all is not fair in love and   
   taxes. Just because you are willing to share your wealth with your better half   
   doesn't mean the    
   CRA is quite as generous.   
      
   While a transfer of property between spouses qualifies for an automatic   
   tax-deferred rollover, any income arising from this gifted property doesn't   
   benefit from the same treatment.   
      
   The general rule is that any subsequent income generated from transferred   
   property will be attributed back to the transferorspouse. There are, however,   
   exceptions to this rule.   
      
   Making the Most of Independent Capital   
   When the lower-income spouse has independent capital, the earnings generated   
   on the capital will generally be taxable to the lower-income spouse. A simple   
   rule is to make sure that the lower-income spouse invests their capital, and   
   use the higherincome    
   spouse's earnings or capital for day-to-day living expenses.   
      
   Examples of independent capital can include just about anything that doesn't   
   come from the higher-income spouse, such as a gift or inheritance from a   
   parent, or earnings from a lowerincome job.   
      
   You can maximize a spouse's independent capital in a number of ways. First,   
   use the higher- income spouse for personal expenditures – including paying   
   the lower-income spouse's taxes. Or, if a parent of one of the spouses is   
   thinking of giving some    
   money to the family, it makes sense from a tax-planning perspective if the   
   gift is given to the lower-bracket spouse.   
      
   Tax Tip: Make sure that the lower-income spouse's earnings and other   
   independent capital are segregated in his or her own bank account and not   
   commingled with money that comes from the higher-income spouse, as is the case   
   with joint accounts. That way,    
   there should be no question about who pays the tax on the income.   
      
   Make sure that these "pure" accounts continue to "track." By this I mean, if   
   the money is invested in stocks, it should go into a separate "pure" brokerage   
   account in the sole name of the lower income spouse.   
      
   The Loan Manoeuvre   
   I often write about the Loan Manoeuvre strategy. You can avoid the attribution   
   rules if the investment is funded by a loan from you, the higher-income   
   spouse, provided that the spouse pays you interest at the "prescribed rate" in   
   effect at the time the    
   loan is made (currently one per cent).   
      
   Moreover, the interest on this loan has to be paid no later than January 30 of   
   each year. If you miss even one deadline, the attribution rules will apply   
   forevermore.   
      
   If you don't have cash to loan to your spouse, consider doing a loan in kind.   
   For example, if you have a securities portfolio in your name, transfer the   
   portfolio to your spouse and have your spouse issue a demand promissory note   
   reflecting the    
   prescribed interest rate for an amount equal to the fair market value of the   
   portfolio at the time of the transfer.   
      
   However, this transfer may be subject to capital gains tax by you, the   
   transferor, as the transaction would have to be made at the portfolio's fair   
   market value.   
      
   The Swap Rule   
   Special rules allow your spouse to pay tax on income or capital gains from an   
   asset which you transfer – provided that your spouse "buys it" from you, and   
   pays for it with an asset having at least an equivalent value. Obviously, this   
   technique works    
   best if the spouse pays for the investment with personal-use (i.e.,   
   non-income-earning) assets that he or she directly owns.   
      
   One drawback is that, to qualify for this break, you are subject to tax rules   
   that treat you as if you sold the investment at its current market value. As a   
   result, you are potentially subject to capital gains treatment on any   
   appreciation in value when    
   you swap the investment.   
      
   But if you have capital losses, you may be able to offset the gains exposure,   
   or you may be sitting on a number of stocks that are in a loss position. In   
   that case, you may want to consider swapping those stocks and trigger a loss.   
      
   In many cases the swapped investments may not have appreciated in value in the   
   first place, and therefore no capital gains exposure would have occurred. This   
   will usually be the case, for example, with bank accounts, GICs, and so on.   
      
   Watch out for rental or business real estate, though: even if it hasn't   
   appreciated in value, previous years' depreciation claims could be included in   
   your income ("recaptured") if you transfer real estate. Moreover, you could be   
   triggering land transfer    
   tax on transfers of real property, regardless of whether it's for business or   
   personal use.   
      
   Of course, there is a problem if your spouse does not have swappable assets to   
   begin with. In most families, however, something is usually available e.g.,   
   interest in a home held jointly, or perhaps a car.   
      
   Alternatively, if you and your spouse are seniors, it is possible to pool your   
   retirement pension income in order to income split. But there are some   
   specific eligibility rules in order to do this:   
      
    For those age 65 and over, eligible pension income includes lifetime   
   annuity payments under a registered pension plan, an RRSP or a deferred   
   profit-sharing plan, and payments from a RRIF.    
    For those under 65 years of age, eligible pension income is limited to   
   lifetime annuity payments from a registered pension plan and certain other   
   payments received as a result of the death of the individual's spouse.   
      
   Note that amounts received from a government pension plan (i.e. Old Age   
   Security, Guaranteed Income Supplement, CPP/Quebec Pension Plan) are not   
   eligible for the new pension splitting rules. (While CPP income does not   
   qualify as eligible pension income    
   for the pension income credit, existing rules permit CPP pensioners to split   
   their CPP retirement benefit.)   
      
   In order to take advantage of this income splitting strategy, both you (as the   
   recipient of the eligible pension income) and your spouse must agree to the   
   allocation in your tax returns for the year in question. (Note: the allocation   
   must be made one    
   year at a time.) Up to one-half of your pension income can be allocated to   
   your spouse.   
      
      
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