Start the new year with a spousal loan strategy to reduce taxes

Prescribed interest rate for Spousal Loans will decrease to 1% for Q1 2014

January 2014


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. This strategy works if the income earned on the invested assets is greater than the interest cost on the loan. The Canada Revenue Agency (CRA) allows for a “prescribed” interest rate to be used for these low interest loans.

Now may be the opportune time to consider putting this strategy to work for you. After increasing the prescribed interest rate from 1% to 2% last September, CRA has now announced that it will decrease the rate back down to 1% for Q1 2014.

Spouses can thus take advantage of this low prescribed rate of 1% by setting up a spousal loan on or after January 1, 2014.

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. In this way, an existing loan arrangement at the previous 2% interest rate could be renegotiated to the lower rate now coming into effect.

It is important to document the loan with appropriate terms and conditions in order to satisfy CRA requirements. If properly set up, the income on the loan and its associated tax liability will be taxed in the hands of the spouse in the lower tax bracket without triggering the attribution rules.

One of these conditions requires the loan interest to be paid to the spouse who loaned the funds by January 30th of each year. So if you already have a spousal loan arrangement in place, make sure to pay the interest to your lending spouse before the deadline. 

         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.
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