While many Canadians focus on individual tax-saving methods, they often miss out on strategic family-based tax planning opportunities that could significantly reduce their overall tax burden. One such overlooked tactic is the spousal loan strategy in Canada, which allows couples to legally split income and lower their collective tax liability by lending funds from a higher-income spouse to a lower-income spouse at the CRA’s prescribed interest rate.
However, income splitting isn’t as simple as transferring money between spouses. The Canada Revenue Agency (CRA) enforces attribution rules under the Income Tax Act, which prevent high earners from gifting money to their spouse and shifting the tax burden.
For example, if a high-income individual gives $100,000 to their spouse to invest, the investment income is typically attributed back and taxed at the higher marginal rate. The spousal loan strategy provides a compliant workaround, ensuring the income is taxed in the hands of the lower-income spouse when structured correctly.
What Is a Spousal Loan?
A spousal loan is a legal financial arrangement where a higher-income spouse lends money to a lower-income spouse (or to a family trust for the benefit of minor children) at the CRA prescribed rate spousal loan. The goal is to enable the lower-income spouse to invest the loaned funds and earn taxable income such as dividends, interest, or capital gains, which is then taxed at their lower marginal tax rate.
When structured properly, this strategy avoids CRA attribution rules that would otherwise tax the income in the hands of the higher-income spouse. It’s one of the few compliant ways Canadian families can split income and reduce their overall tax burden, especially in a low-interest environment.
Smart Income Splitting with Spousal Loans
- Legitimate Income-Splitting Tool
The spousal loan strategy in Canada is a compliant way to shift income within a family without triggering CRA attribution rules. - Ideal for Low-Interest Environments
It’s especially effective when the prescribed interest rate for spousal loan is low, increasing the potential tax savings. - Loan to Spouse or Family Trust
A high-income spouse can lend funds to a lower-income spouse or a family trust for minor children to generate investment income taxed at lower rates. - Returns Must Exceed Interest Rate
For the strategy to work, the investment return must exceed the spousal loan interest rate in Canada to ensure a positive after-tax gain. - Timely Wealth-Building Opportunity
With current CRA rates remaining low, this strategy offers Canadian families a valuable chance to grow wealth efficiently and legally.
How the Spousal Loan Strategy in Canada Works
To successfully implement the spousal loan strategy, two key conditions must be met to ensure the income is not attributed back to the higher-income spouse:
A Formal Written Agreement Must Be in Place
- The loan must be clearly documented with a signed agreement stating the amount, terms, and spousal loan interest rate in Canada.
- The interest rate must be set at or above the CRA’s prescribed rate in effect at the time the loan is issued, which has typically ranged between 1% and 2% in recent years.
- Proper documentation helps validate the arrangement if reviewed by the CRA and avoids unfavourable loan to family member tax implications.
Interest Must Be Paid Annually by January 30
- The borrowing spouse must pay the full annual interest on or before January 30, which is the official spousal loan interest payment date as required by the CRA.
- Missing this deadline could trigger CRA attribution rules, causing all income to be taxed in the hands of the high-income lender.
- When both conditions are met, the investment income earned, whether through capital gains, dividends, or interest, is taxed at the lower-income spouse’s marginal rate, resulting in significant long-term tax savings for the family.
Benefits & Key Statistics of the Spousal Loan Strategy
- Significant Tax Savings
Helps reduce family tax bills by shifting income from a high-income spouse (taxed at up to 50%) to a lower-income spouse (taxed at around 26% or less). - Optimises Capital Gains Threshold
Recent corporate tax legislation changes have raised the capital gains inclusion rate to 66% for amounts exceeding $250,000, while gains below that threshold continue to benefit from the 50% inclusion rate. The first $250,000 still enjoys the 50% inclusion rate, which can be maximised by directing gains to the lower-income spouse. - Complements Other Income-Splitting Tools
Works alongside spousal RRSPs and pension income splitting. Unlike those, the spousal loan strategy has no age limits or contribution ceilings, making it a flexible planning option.
Legislative Context
- New Capital Gains Rules for Corporations and Trusts
Since June 25, 2024, a 66% inclusion rate applies to capital gains over $250,000 for corporations and trusts. - Individuals Still Benefit from Lower Rate
Individuals still benefit from a 50% capital gains inclusion rate on the first $250,000 of annual gains, preserving a valuable tax advantage under the current rules. - Boosts the Spousal Loan Strategy
By shifting gains to a lower-income spouse, families can keep more income within the lower inclusion threshold, enhancing tax efficiency.
Integrating into the Canadian Corporate Context
- Federal Corporate Tax Rate
The current federal corporate tax rate in Canada is 15%. - Ontario Corporate Tax Rate
In Ontario, the general rate is around 11.5%, creating a combined effective rate of about 26.5%. - Small Business Tax Rate (Q2)
The small business company tax rate in Q2 in Ontario is approximately 12.2%, in line with national corporate tax brackets. - Ongoing Legislative Changes
All corporate rates are subject to annual updates via corporate tax legislation changes, which impact tax planning at both corporate and personal levels.
Next Steps & References
Once you understand how the spousal loan strategy works, the next step is putting it into action, correctly and compliantly. Here’s how:
- Track the CRA’s Prescribed Interest Rate
CRA updates its rate quarterly, typically between 1% and 2%. Ensure your loan reflects the prescribed interest rate for spousal loans. - Prepare a Formal Loan Agreement
A clear written agreement helps prove that the loan is legitimate and prevents adverse loan to family member tax implications. - Monitor Tax Legislation Changes
Stay updated on changes to personal tax brackets, capital gains rules, and spousal loan interest rate in Canada to maintain compliance.
Conclusion
The spousal loan strategy in Canada is a tax-efficient, low-risk method to split income legally and reduce a family’s overall tax bill. When set up correctly with a formal agreement, annual interest payments, and awareness of legislative updates, this strategy becomes a cornerstone of smart financial planning.
Whether you’re navigating new capital gains rules or aligning with shifting CRA prescribed rate spousal loan policies, spousal loans can help families preserve wealth, and do so within full legal compliance.
