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Before making a major financial decision you
should consult a qualified professional.
Income Tax Act s. 74.5(2), Income Tax Regulations s.
If one spouse is in a higher tax bracket, it may be beneficial to lend
money to the lower-income spouse. Money can also be loaned to a child. The funds can be used to purchase investments,
and tax on
the investment income will be paid by the lower-income
spouse at a lower marginal rate. A promissory note should be
written for the loan, with the interest rate and principal amount
specified. Interest must be paid on the loan by January 30th of each
year. In order for attribution rules to not be applied, the interest rate charged must be greater than or equal to the
- the prescribed rate set by Canada Revenue Agency (CRA) at the time the
loan is made, or
- the rate that would, having regard to all the circumstances, have been agreed on, at the time the loan was made, between parties dealing with each other at armís length.
The prescribed rates are subject to revision
each calendar quarter, and can be found on the CRA prescribed
interest rates page. The rate to use is the one for calculating
taxable benefits from low-interest and interest-free loans to employees and
shareholders. This rate was reduced from 2% to 1% effective April 1,
2009. The rate doubled to 2% for the period of October 1 to December
31, 2013. Any loans created from October 1 to December
31, 2013 will
use the 2% rate throughout the loan. The
rate was reduced to 1% effective January 1, 2014, and continues to be 1%
until at least September 30, 2017.
The interest received by the lender must be included in income, but is
deductible as carrying charges by the borrower, as long as a loan agreement
has been drawn up so that there is a legal obligation for the borrower to
pay the interest.
Example for Ontario residents:
Mr. A earns employment income of $80,000 per year.
Mrs. A earns $34,000 per year.
Mr. A has accumulated savings of $100,000, he and Mrs.
A have no debt, he has used his maximum RRSP
contribution room, and he would like to purchase
investments outside of RRSPs.
Mr. A lends the $100,000 to Mrs. A on January 1,
A promissory note is written up, specifying that the
loan is made at the current prescribed interest rate of 1%.
Mrs. A invests the $100,000 in Canadian stocks
yielding 10% (3% dividend, 7% capital gain).
Canadian dividend income of $3,000 in 2013 is reported
by Mrs. A on her 2012 tax return, which equates to $4,140 of taxable income because Canadian dividends are grossed-up by
38% to include in income. The dividends are eligible for the enhanced
dividend tax credit.
Mrs. A pays $1,000 (1%) interest expense to Mr. A on
December 31, 2012. This interest expense is
deducted on line 221of Mrs. A's 2012 tax
- Maximize RRSPs
(especially spousal for the lower income spouse)
- Carefully check
your own circumstances, and get professional advice
- The lending to
spouse strategy saves very little tax if $100,000 or less is