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Lend Money to Your Spouse or Child for Investments
Income Tax Act s. 74.1(2), 74.5(2), Income Tax Regulations s. 4301(c)
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 minor child (under 18 years of age, as defined by Income Tax Act s. 74.1(2)) to avoid the attribution rules. However, legal advice is advised. 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 lesser of:
In order for this to work, the investments from borrowed funds should be in a separate investment account in the borrower's name.
The prescribed rates are subject to revision each calendar quarter, and can be found on the CRA prescribed interest rates page, but this is not usually updated until just before the calendar quarter to which the rate applies. The rate to use is the rate for calculating taxable benefits from low-interest and interest-free loans to employees and shareholders. However, for employees and shareholders, the interest is calculated based on the prescribed rate for the period during which the loan is outstanding, not on the prescribed rate at the time that the loan is made.
The prescribed rate was 1% from July 1, 2020 to June 30, 2022, and has increased steadily since then.
The prescribed rate for 2023 Q4 is 5%, based on 3-month treasury bills sold at auction in July 2023. The rate is rounded up to next higher whole percentage.
The prescribed rate for 2024 Q1 starting January 1, 2024 will be 6%, based on the 3-month treasury bills sold at auction in October 2023.
Any loans to spouses or children created from July 1, 2020 to June 30, 2022 will use the 1% rate throughout the loan. Loans created from April 1 to December 31, 2023 will use the 5% rate throughout the loan.
This also means that the interest rate for overdue tax payments (balances and instalments) will increase to 10% for January to March 2024.
Refinancing an Existing Loan?
One cannot simply refinance an existing loan that is at a higher interest rate, using the current lower prescribed rate. As per Tax Interpretation 2002-0143985, this would likely trigger the attribution rules. However, if enough of the original leveraged investment is sold to pay off the original loan, then a new loan is provided to purchase investments, the attribution rules would not apply, according to the article CRA offers flexibility on prescribed rate loans, which refers to CRA comments on this at a Canadian Tax Foundation conference.
The prescribed rate for loans to shareholders, spouses and minor children is defined by Income Tax Regulations s. 4301(a) and (c), as an average of the rates for 3-month Treasury Bills sold at auction during the first month of the preceding quarter. It is rounded up to the nearest whole percentage.
Tax Treatment of Loans to Spouse or Children
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. Using joint accounts for the payment or receipt of the interest could cause problems, as there must be clear records that the spouse has paid the interest.
Example for Ontario residents:
Investments in a Loss Position
If the investments have declined in value and the spouse cannot repay the loan, you may decide to forgive the loan, and debt forgiveness rules may apply. If you want to learn more about this, you should seek the advice of a Chartered Professional Accountant (CPA) experienced in this area.
See our article on attribution rules re gifts, transfers or loans to a spouse or related minor child. Although there are no attribution rules for a gift of funds to a spouse or minor child for any use other than purchasing income-producing investments, it must be clear that the spouse has actually paid interest on the loan.
Another option besides lending money to a lower income spouse is for the higher income spouse to pay for all household and family expenses, and the lower income spouse can invest all income earned. Obviously, the lower income spouse would only be able to invest as much as their net income after tax. This would work best if there were separate bank accounts for income from each spouse, even if both accounts were joint accounts. The important thing to remember is that records must be kept that clearly show the source of the income used to invest.
Canada Revenue Agency (CRA) Resources
Prescribed rate loans for family income splitting by Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC Private Wealth
Prescribed Rate Loan Strategy Guide and FAQ from TD Wealth
What to consider before lending money to loved ones from CPA Canada, by Mathieu De Lajartre
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 invested.
Revised: November 10, 2023
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