A strategy to increase net worth & reduce income tax
If your spouse pays tax at a lower rate than you, you may want to consider lending him or her money to invest so that the associated income is taxable at his or her marginal tax rates. This is referred to as a spousal prescribed rate loan strategy.
Canadian tax law includes attribution rules that will ordinarily redirect investment income earned on assets loaned or transferred between spouses. However, these rules do not apply if the funds are loaned at the Canada Revenue Agency’s (CRA) prevailing prescribed interest rate and the interest on the loan is paid on an annual basis, on or before January 30th of the following year.
The CRA’s prescribed rate is announced quarterly and may increase or decrease in the future. The prescribed rate remains at 2% for loans entered into prior to December 31, 2019.
The prescribed interest rate paid between spouses can be locked in for an indefinite period of time at the rate in effect at the inception of the loan. Therefore, it may be advantageous from a tax perspective to implement this strategy in a low interest rate environment, as is currently the case.
This strategy may be successful if the after-tax income earned on the invested assets is greater than the after-tax interest cost on the loan. This investment income will be taxed in the hands of the spouse in the lower tax bracket.
Interested in reading more about spousal loans?
For more information on the spousal loan strategy and how it may help reduce taxes for your family, contact us for a copy of our complimentary education article on the topic.