Suzanne (income $120,000) lends $150,000 to her husband, Mark (income $40,000), at the prescribed rate of 2% to invest in dividend-paying stocks. In the first year, Mark's investments generate $9,000 in eligible dividend income. Following the attribution rules, how should this income be reported for tax purposes, assuming interest was paid on time?

Question: Suzanne (income $120,000) lends $150,000 to her husband, Mark (income $40,000), at the prescribed rate of 2% to invest in dividend-paying stocks. In the first year, Mark's investments generate $9,000 in eligible dividend income. Following the attribution rules, how should this income be reported for tax purposes, assuming interest was paid on time?

Answer options:

• All $9,000 is taxed in Suzanne's hands.
• All $9,000 is taxed in Mark's hands. ✅ $3,000 is taxed in Suzanne's hands, and $6,000 is taxed in Mark's hands.
• $6,000 is taxed in Suzanne's hands, and $3,000 is taxed in Mark's hands.

Correct answer: $3,000 is taxed in Suzanne's hands, and $6,000 is taxed in Mark's hands.

Explanation: The prescribed interest payable is $150,000 * 2% = $3,000. This amount is attributed back to Suzanne, and she must report it as interest income. The remaining income of $9,000 (total) - $3,000 (attributed to Suzanne) = $6,000 is Mark's investment income and is taxed in his hands as eligible dividends.