When should you loan investments or money to your spouse?

“Should I loan investments or money to my spouse?”

The idea is to split income, following Canada Revenue Agency guidelines, so the family pays less tax overall.

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Q. I’m 38 years old and have been married for 10 years. I would like to set up a spousal loan to my wife, who works part-time while raising our two young sons.

How would I go about doing this correctly? And is there any special consideration of a cash versus “transfer-in-kind” of stocks, other than that they would be considered sold and I would have to pay any capital gains tax on their appreciation in value at the time of transfer? Or, for record-keeping purposes, would it be better if I sold the stocks to loan cash?
–Ralph

A. The idea behind a spousal loan is to lend money from a high-income spouse to a low-income spouse. If the subsequent return on the investments exceeds the loan rate prescribed by the Canada Revenue Agency, the general result is that income is effectively moved from one spouse to the other, and the family may pay less tax overall.

Interest paid by the borrower is tax-deductible, as the borrowed money is for investment purposes. Interest income received by the lender is taxable, just like interest income on savings accounts, GICs* or bonds.

For income tax purposes, spouses need to worry about attribution. Attribution is when income earned by one spouse is attributed back to another spouse and instead taxed in their name. There are several situations in which attribution can apply.

In this case, Ralph, if you have cash or own non-registered investments accumulated from your past earnings and savings, the resulting income is taxable on your tax return. You can’t just give cash or investments to your wife and have the income taxed on her tax return. This would trigger attribution, with the subsequent investment income being taxable back to you. (I’m guessing you already know this, as you’ve asked specifically about loaning cash or investments to your wife.)

However, if your wife saved her part-time earnings, and you both used your earnings to pay for family expenses instead, this is one legitimate way to build up a taxable, non-registered investment portfolio in your wife’s name to be taxed to her.

Given you have existing cash and non-registered investments that belong to you for tax purposes, Ralph, you need to consider not only how, but if you should establish a spousal loan.

I don’t want to speculate, but given your relatively young age, I can’t help but ask about alternative options to non-registered investing. Is your RRSP* maxed out, Ralph? What about TFSAs* for you and your wife? You have young children—have you maxed out their RESPs? Depending on your tax bracket, retirement plans, post-secondary education funding targets and other factors, you may be better off focusing on these other accounts before non-registered investing or considering a spousal loan.


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If you have debt, including a mortgage, you need to consider your risk tolerance, investment fees, mortgage rate and short-term cash flow, all of which may result in debt repayment being a good alternative to a spousal loan strategy.

Assuming a spousal loan is a viable option, Ralph, you and your wife would want to choose a loan amount that she could invest for the medium or long-term. Money loaned from one spouse to another at the Canada Revenue Agency “prescribed” rate—currently 2%—can have resulting investment income taxable to the recipient spouse.

A lawyer could certainly be used to prepare the loan agreement, Ralph, but the main considerations are that the loan is a promissory note at the current prescribed rate of interest with payments due annually by no later than January 30—including the first year that the loan is made (likely a partial, prorated year). Perhaps the more important professional advice for a spousal loan is tax advice, to ensure that the strategy will indeed result in less tax payable by you and your wife.

The rate at the time that the loan is made can stay in effect for the life of the loan. For several years, the prescribed rate for spousal loans stood at 1%, but it rose most recently in April 2018 to the current 2% rate that applies as of the third quarter of 2019.

If you transfer existing non-registered assets in kind, such that your stocks, bonds, ETFs or mutual funds are moved over as-is to your wife, you will need to recognize any resulting capital gains or losses on your tax return. The market value of the investments on the date of transfer can be used to determine the amount of the spousal loan, and the loan is considered payment (consideration) triggering any deferred capital gains or losses for you.


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Whether you should use cash or non-registered assets to fund the loan will depend: If you have large deferred capital gains, that may be one reason to reconsider using those assets. But the long-term tax savings from future income being taxable to your wife may be worth it to realize some of the tax payable today.

If you have a large amount of cash and non-registered assets—at least $100,000 and potentially $500,000 or more, depending on your circumstances—you may want to consider setting up a discretionary family trust. This could be a way to split income not only with your wife, Ralph, but also with your children.

Income splitting can be a wise tax strategy in the right circumstances. And, if you do it right, it can be a legitimate way for families to pay less overall income tax.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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