Spousal Loan Case Study

 

Purpose

Mrs. and Mr. Jones came to Nicol Sanchez Wealth looking for ways to improve their after-tax result.

Mrs. Jones is a high-level executive while Mr. Jones has chosen to stay home and take care of their young children. Here are the key pieces of information:

  • Mrs. Jones earns a significant income and is in the highest tax bracket. We’ll use 50% for the sake of this case study.

  • Mr. Jones has no taxable income.

  • Mrs. Jones has accumulated $1 Million of personal savings in a non-registered account.

  • Mr. Jones has negligible personal savings.

Mrs. Jones’ portfolio earns 5% return per year, all of which is taxed as interest income. While her portfolio return is $50,000, she pays 50% of that to taxes for an after-tax return of $25,000.

 

Direction

A Spousal Loan is a straightforward strategy to implement for the Jones’.

Mrs. Jones loans $1 Million cash to Mr. Jones. This loan must be made using the Prescribed Rate, which is currently 1% per year1. Mr. Jones then invests in the exact same portfolio, earning a 5% return per year that is taxed as interest income.

Now, the tax situation is:

  • Mr. Jones earns $50,000 but must pay $10,000 to Mrs. Jones.

    • Mrs. Jones pays $5,000 (50%) to tax, ending up with $5,000 net of taxes.

    • Mr. Jones will pay about $6,000 in tax2, ending up with $34,000.

As a family, the Jones’ have an after tax return of $39,000, a $14,000 improvement over their current situation.

1As of February, 2018.

2Actual taxes owing depends on your Province of residence

 

Alignment

Continuously monitor the strategy to ensure that it is still appropriate.

Annual reviews with the Jones’ ensures that the Spousal Loan is still the appropriate strategy to help them achieve their financial goals. This includes:

  • Regular discussions on the investment portfolio itself, maintaining the proper asset allocation.

  • Upgrading investments to ensure that the Jones’ own “best of class” strategies.

  • Discussing other strategies, such as Family Trusts to see if there are ways to further improve the long-term result.

 

Our goal at Nicol Sanchez Wealth is to understand our clients’ unique goals and continually provide unbiased advice designed to help them achieve those goals.

 

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