Spousal investment loans are an effective method of income splitting with your spouse. As an Accountant in Toronto, I have recommended this strategy to many of my clients with great success.
Loan to Spouse – recommended by Accountant Toronto
If you are in a higher tax bracket than your spouse, consider making an investment loan to your spouse.
Here’s how the strategy works:
1) Loan to Spouse
Make a loan to your spouse at the prescribed rate of interest. The prescribed rate of interest is determined by the Canada Revenue Agency (CRA) quarterly, with the current rate being 1%. The loan should be evidenced by a loan agreement (either prepared by a lawyer or yourself).
2) Spouse Invests Loan Proceeds
Your spouse will invest the proceeds from the loan. The investment could be in a mutual fund, bond, real estate or any other profit producing investment.
3) Profit Included in Spouse’s Income
Any investment income or capital gains realized from the investment will be included in your spouse’s income. Your spouse can also deduct the interest paid to you on the loan on his/her personal tax return.
4) Include The Loan Interest in Your Income
You must include the loan interest received from your spouse in your income. With the current rate of 1%, the tax on this is negligible.
Tax Trap
If the prescribed rate of interest is not charged on the loan to your spouse, then the investment income or capital gains earned by your spouse are included in your income. This defeats the purpose of the strategy.
Act Now – Says Accountant Toronto, Allan Madan
With interest rates at historical lows, now is the perfect time to take advantage of this income splitting strategy. As a Accountant Toronto, I can tell you that it’s better to act now, while interest rates are low.
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