Reference no: EM132460275

Question 1: Income Splitting Bill and Hilary are married. Hilary has a marginal tax rate of 40%, while Bill has a marginal tax rate of 0% for the first $12,000, X on the next $20,000 and 40% thereafter. Hilary has $1,000,000 in a GIC in an open investment that earns 4% per annum. Both Hilary and Bill have maximized their respective RRSP and TFSA contribution and do not have any contribution room left. Hilary has heard of income splitting to take advantage of Bill's lower tax rate. The current prescribed interest rate is 2%. Assume an investment horizon of 5 years and all facts are the same over this investment horizon.

Problem A. What would happen from a tax perspective if Hilary gifted the GIC to Bill? Describe the income inclusion and deductions of both individuals relating to the gifting of the GIC from Hilary to Bill.

Problem B. Compute the minimum tax rate X in order to make the FMV loan strategy worthwhile. (Only compute for year 1). If the tax rate cannot be computed, please provide an explanation.

Problem C. If the tax rate X is 25%, compute the minimum pre-tax rate of return on the GIC to make the FMV loan strategy worthwhile. (Only compute for year 1). If the rate of return cannot be computed, please provide an explanation