Urge clients to consider spousal loans

By Doug Carroll | March 18, 2016 | Last updated on September 21, 2023
2 min read

It appears the prescribed interest rate for spousal loans will remain at 1%. Except for Q4 2013, when it edged up to 2%, we’ve had this 1% level since April 2009.

What’s different now is that top-end tax rates have risen. A new top federal rate of 33% for income over $200,000 could motivate spouses to take action by establishing spousal loans.

Spousal loan mechanics

Our personal income tax system is based on the individual as the taxable unit. In the case of property gifted from one spouse to the other, attribution rules cause the transferring spouse to bear the tax liability on investment income.

However, where the transaction is structured as a loan, those attribution rules can be circumvented, allowing the borrowing spouse to record the income.


  • Interest payments must be made from borrower to lender during the calendar year or no later than 30 days after year-end (January 30).
  • The source of the interest payments must be the borrowing spouse’s own funds, and therefore cannot be simply capitalized to the loan or be part of a revolving loan arrangement.
  • The rate must be commercially reasonable, and be no less than the rate prescribed by income tax regulations (currently 1%).

So long as the loan is properly serviced, it may remain outstanding indefinitely at the rate established at the outset.


Consider $1 million loaned at 1% between spouses in the province of Alberta. Ignoring current market rates, assume it will earn 4% interest income.

The top federal bracket has increased from 29% to 33% for income over $200,000. The top provincial rate went from 10% to 15% on income over $300,000, taking the top combined rate from 39% to 48%. The borrowing spouse has an income of $50,000, thus benefiting from the 1.5% middle class tax cut, for a combined rate of 30.5%.

Absent the loan, the higher-income spouse would pay $19,200 tax on $40,000 interest income.

By using the loan, the borrower deducts the $10,000 spousal loan interest, arriving at $30,000 net income and a $9,150 tax bill. The lender owes $4,800 on the spousal loan interest, for total tax of $13,950 between them. That is a $5,250 savings.

In this example, the annual after-tax savings is about 0.5%. But it’s unlikely a loan like this would be set up for interest investing alone; actual savings will vary with the type of return generated.

If the lower-income spouse has zero income, his new investment income would cause a corresponding reduction/elimination in the amount the higher-income spouse could claim for the spousal credit.

A few other items of note. If a spouse borrows to invest in an investment that only generates unrealized capital gains, keep in mind that the investment is not generating income to pay the interest on the loan.

Also, in the case of professionals or other business owners (prime candidates for spousal loans), dividend sprinkling is often used for income splitting, so a spousal loan could be layered on top of that.

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Doug Carroll

Doug Carroll, JD, LLM (Tax), CFP, TEP, is a tax and estate consultant in Toronto.