Case study: Spousal loan

             

How can we maximi ze our after-tax dollars?

The following is based on one of Ellis Wealth’s clients. All of the names and telling details have been changed to preserve client privacy.

Peter and Susan are like many of our clients at Ellis Wealth. They are both pre-retired professionals in their mid-50’s and look to us to provide clarity to their busy lives. Peter is an executive at a software company and his wife, Susan, recently began working part-time as a consultant after spending many years working long hours as a marketing director.

Their situation:

  • Starting to save in taxable investments after mortgage recently paid off
  • RRSPs and TFSAs maxed out
  • Stock options in Peter’s company
  • High earning stage of life
  • Large bonus every year for Peter


After years of working with our team, Peter and Susan have set a goal of saving $3 million before retirement to provide them with enough cash flow to maintain their lifestyle. While having no immediate plans to retire, Peter had a desire to begin working less in 5 years. It was clear that RRSPs and TFSAs would not be sufficient and the time was right to begin saving aggressively in their taxable portfolio. Although they were saving a large portion of their after-tax income that was previously used to pay down the mortgage, they were worried they would not reach their goal of $3 million that would allow them to retire in comfort.

The risky nature of the large percentage of their portfolio in stock options and the high tax burden they faced on taxable investments made them wonder if Susan should go back to working in a more steady position. To help move them from where they were to where they wanted to be we proposed a solution that would help give them peace of mind; a spousal loan. A spousal loan would allow most of the tax-burden from the taxable portfolio to be shifted to Susan at a much lower rate and help them reach their goal sooner rather than later.

While on the surface, a spousal loan may appear like a confusing strategy, it is actually simpler than it seems.

Peter transfers his after-tax yearly bonus to Susan as a loan with a prescribed low rate currently at 1%, and Susan pays the interest on that loan back to Peter within 30 days of the end of each year. The income earned on the investments is taxed at Susan’s low rate, and while Peter earns income from the interest Susan pays him, Susan gets a deduction for the interest she pays Peter. As a result of implementing this sophisticated tax-efficient strategy into their portfolio, Susan and Peter are well on their way to reaching their retirement goal on schedule.

The tax savings from a spousal loan may not seem considerable, but as investments continue to earn more than the interest charge to Susan this is one more piece of the puzzle to achieve their goal.

A spousal loan is just one of the tax-efficient strategies that have allowed Susan and Peter to have more confidence that they will reach all of their financial goals. Peter will soon be able to begin working less and Susan’s consulting job will be more than adequate. If she decides to return to full-time work we are here to guide them along their journey. Having the confidence they will reach their goals has allowed them to live life on their terms and look forward to having more time together in the future.

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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. 


The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates.
Richardson GMP Limited, Member Canadian Investor Protection Fund.Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

What is a spousal loan?

A spousal loan is an income splitting strategy that transfers investment income from a higher income earner to the lower income spouse to reduce the total income tax paid in the family. 

This strategy works if the income earned on the invested assets is greater than the interest cost on the loan. The CRA allows for a “prescribed” interest rate to be used for these low interest loans.