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As you know, the prescribed rate sets the minimum interest rate someone in a higher tax bracket could charge a person in a lower tax bracket for the purpose of income splitting. What's the rate to stop a person from doing the opposite?

ie. Person A in a lower tax bracket loans to Person B in a higher tax bracket $10,000 at interest rate at 100% per year. Person B can deduct the interest paid from his taxable income.

So is there a set interest rate to stop this kind of shenanigans?
 

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Yes, but prescribed rate is the minimum rate, which does nothing to stop the situation I gave as the example. I'm sure GAAR would catch it, but is there a more specific maximum rate?
 

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ie. Person A in a lower tax bracket loans to Person B in a higher tax bracket $10,000 at interest rate at 100% per year. Person B can deduct the interest paid from his taxable income.

So is there a set interest rate to stop this kind of shenanigans?
100% interest rate is usurious.
I'm sure CRA will disallow it in a case like this.
Try it and let us know how it goes :)
 

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Sorry, I did not read your earlier question very carefully!

The answer is yes - there is a specific section of the ITA which prohibits what are called "artificial attributions:"

ITA 74.5(11) – Artificial Transactions: Notwithstanding any other
provision of this Act, sections 74.1 to 74.4 do not apply to a transfer or
loan of property where it may reasonably be concluded that one of the
main reasons for the transfer or loan was to reduce the amount of tax that
would, but for this subsection, be payable under this Part on the income
and gains derived from the property or from property substituted
therefor.


Here's the CRA interpretation bulletin which addresses artificial transactions: http://www.cra-arc.gc.ca/E/pub/tp/it511r/it511r-e.html

In general, when spouses are dealing with one another, in order to have the attribution rules applied they must use "the interest rate that would be agreed upon between arm's length parties under similar circumstances."

And, FWIW, interest rates in excess of 60% are prohibited by the Criminal Code. I'd link the section but Jiminy Cricket, it is nearly 2 a.m. I'm only awake because I am up with a very very sick child. Editing to say GhostRyder has given you the section.
 
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