Are there tax implications to my parents helping me to pay off my student loan?
December 28, 2011 10:12 AM   Subscribe

[Canada Tax Filter] If my parents loan me money to pay back a non-government student line of credit from a bank, and I pay them a portion of the principal each month, are there any negative tax implications?

My bank is charging me 6% and my parents have some liquidity from their recent house sale currently at around 1.8%. We have talked about me giving them 3% as it would be a win-win for both of us.

We are pretty sure that the one time payment on their end would be tax free, but we are concerned that a monthly amount for the next X number of years would be construed as income. As a family of civil servants, we want to pay the taxes we're supposed to pay, etc, but not pay taxes we don't have to pay.

Any tips you could give me would me much appreciated.
posted by dobie to Work & Money (5 answers total)
Its a loan, so your repayments of the principal would not be taxable for them. You could argue that the interest you pay them would be income and they should report that, or you could call it a gift from you to them - I don't know about Canadian gift tax but I highly doubt it would meet the threshold of requiring reporting.
posted by jacalata at 10:47 AM on December 28, 2011

I found this, which sounds pretty clear, from this CRA page:

You may have to report income, such as dividends (see line 120) or interest (see line 121) from property (including money and any replacement property) you loaned or transferred to your spouse or common-law partner, child, or other relative.
posted by BozoBurgerBonanza at 10:49 AM on December 28, 2011

The threshold is anything over $0 you have to report, but you only need documentation (like a T5) for amounts over $50.
posted by BozoBurgerBonanza at 10:51 AM on December 28, 2011

There are rules about the interest that must be charged:

• The loan must charge interest at a rate that is at least equal to the prescribed rate (updated quarterly) set by the CRA at the time the loan is made; if the commercial loan rate is lower than the prescribed rate at the time the loan is made, this lower commercial rate can be used

The interest paid is taxable, yes.

This issue is generally about a high-income person "loaning" their low-income family member money to make investments in a lower tax bracket -- if the loans don't look like real loans (paid back on time, using the person's own money, using a reasonable rate of interest) then the income from those investments is attributed back to the person who "loaned" the money.

The current prescribed rate is, I believe, 1%, so you should be fine.

You should, however, confirm these facts with a professional and not rely on the internet for tax planning.
posted by jeather at 11:31 AM on December 28, 2011 [1 favorite]

I'm not a tax accountant, but if they make a gift to you, and later on you make a gift back, I don't believe there are any tax ramifications at all.
posted by musofire at 12:12 PM on December 28, 2011

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