Spousal Loans: A strategy to increase net worth and reduce tax
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Consider reducing your family income tax by using a spousal loan. A spousal loan is an income splitting strategy that transfers investment income from a higher income earner to the lower income spouse to reduce the total income tax paid in the family without triggering the attribution rules.
Because of our current low interest rate environment, now is an opportune time to consider this strategy. The Canada Revenue Agency has recently confirmed that the current “prescribed” rate of 1% has been extended to the third quarter of 2012. This rate, the lowest in history, may be used to establish a spousal loan provided it is implemented before September 30, 2012.
How does this strategy work?
This strategy works if the income earned on the invested assets is greater than the interest cost on the loan. The income on the loan and its associated tax liability will be taxed in the hands of the spouse in the lower tax bracket.
One of the advantages of this strategy is that the spouse’s loan can be locked-in at this prescribed rate for an indefinite period of time. The promissory note should indicate that the loan can be repaid at any time permitting flexibility should circumstances change. You must also ensure that the promissory note is well documented and has appropriate loan terms and conditions in order to satisfy Canada Revenue Agency requirements.
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For more information on this strategy and whether it would be appropriate for you, or to receive our complimentary publication on the subject, please contact your Richardson GMP Investment Advisor.