Tax Tips: Spousal loans

By Vikram Barhat | December 14, 2011 | Last updated on September 15, 2023
2 min read

While there is little one can do about the vagaries of the stock market, there is plenty an advisor can do to help clients control how much tax money they fork over to the CRA.

One time sensitive year-end tax tip is for clients to loan money to their spouses and split the income.

With interest rates at historically low levels, it might make sense to move money to the partner with a lower marginal tax bracket so they can then invest the loan proceeds and include the income/capital gains in his or her income. However, to avoid negative tax consequences, the recipient must pay the interest owing no later than January 30, 2012 and certain other conditions must be met.

This scenario assumes that one of the spouses has a lower marginal rate, lower income, or doesn’t work outside the home.

“If I gift money to a spouse and the spouse earns income, that income will attribute back to me. I can’t just gift money,” says Dent. “If I loan the money to a spouse, as long as it’s at a rate accepted by the CRA, which is currently 1%, and charge interest to my spouse and she pays that within 30 days of the end of each year, she can invest that money, and the income will not be attributed back to me.”

The downside to that is if the spouse triggers losses on the shares then those losses are in their hands, not those of the lender, he adds. “But to the extent she generates capital gains or interest income or dividend income, that income will be taxed in her hands.”

Finally, Dent says this strategy must be implemented with the assistance of tax advisors. “Even if you’re looking at setting up something between you and your spouse in terms of investment, take your financial advisor’s

Vikram Barhat