Income Splitting Using Loans To Your Spouse

by Tax Guy - Burlington Accountant on January 15, 2011 Print This Post Print This Post

One way you can split income with your spouse make an investment loan to your spouse.  The funds are then invested in your spouses name and the income will be taxed in your spouses’ hands.

Structure of The Loan

The loan should be documented in writing and specify both the amount of the loan and the rate of interest as well as repayment terms.  The interest rate used cannot be less than the CRAs prescribed rate of interest at the time the loan was made.  The interest must be paid within 30 days of the end of the year otherwise all of the income will be attributed back to you and all future income will also be taxable in your hands.

The interest you receive on the loan is included in your income and the interest paid by your spouse is deducted from your spouses’ income.

Issues With Spousal Investment Loans

Appropriate documentation is important whenever you engage in income splitting.  As I mentioned, the loan itself should be documented but it also very important to record the payment and receipt of the interest on the loan.

It is questionable whether this type income splitting is worth the effort because the tax savings over the life of the investment may be negligible.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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Shoab December 5, 2009 at 11:08 am

Need advice and help from an accountant who can help me set up loan for spouse for Income splitting to reduce tax

Tax Guy December 6, 2009 at 2:16 pm

@ Shoab: I can’t provide advice or render an official opinion. If you are looking for infomration you can rely on, I would suggest engaging an accountant local to you.

Generally speaking your loan to your spouse should be written and siged by both parties and must have a stated interest rate (aka the prescribed rate currently 1%). It should also have stated repayment terms (interest must be paid annually in full by January 30th) with the balance due upon demand.

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