Are you looking for ways or tactics to reduce your Canadian tax bill? A spousal loan is an effective strategy for couples to minimize their taxes. Having one partner borrow from the other at a low-interest rate can shift income from higher earners, allowing them to access tax credits and save money on taxes.
Splitting income with a spouse can effectively reduce the Canadian tax bill, but it’s essential to understand the rules and regulations associated with spousal loans. In this article, we will explore how couples can use spousal loans to reduce their taxes, along with some considerations on why they may or may not be suitable for you. We will also answer the question: Can I split income with my wife using a spousal loan?
A Form of Income Splitting
There are only so many options for couples to balance their incomes besides pension splitting. There are limited options for reducing the tax burden on the higher earner when one spouse makes significantly more than the other. Help is available in the form of a loan for spouses.
To appreciate how a spousal loan can help you save money on taxes, it helps to know how the Canada Revenue Agency (CRA) normally evaluates monetary transactions between partners in a marriage.
Any investment income your spouse receives after receiving a gift from you is generally subject to Attribution requirements. The giver is subject to taxation on the investment’s earnings in the year the gift is made. Giving your spouse $100,000 to invest and having that investment generate $5,000 in earnings in a given year is treated as a contribution to your income, not your spouse’s. In accordance with the laws for spousal loans, attribution rules will not apply if you lend your spouse $100,000 to invest.
Making Payments With Interest
When one spouse lends money to another, interest is a significant factor to consider. Interest on the loan to your spouse must be at least equal to the rate set by the Canada Revenue Agency (CRA). The prescribed rate has been constant at 1% for several years, so that’s the bare minimum you can charge. Spousal loans require timely interest payments from the borrower to the lender. The good news is that you will only have to pay back the interest on the loan and not the principal.
What You Must Do to Make This Method Work
- Like with any other loan, the terms of this one should be spelled out in writing.
- Incur interest at a rate of at least the minimum allowed by the Canada Revenue Agency (currently 1%). You might be able to secure this rate until the loan is repaid.
- Interest on the loan should be paid annually or within 30 days of the end of the year by the spouse who gets the money. The Attribution Rules will go into effect if a payment is late. This means that the spouse who made the loan will get credit for all the money made from the loan, both in the year it was made and in subsequent years.