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Spousal Loans without the Spousal Groans

Would you rather undergo a double root canal without anesthetic than risk marital Armageddon by asking your spouse to sign a promissory note to borrow money he or she probably thinks is half theirs already? While I applaud your common sense and instincts for self-preservation, the rest of this article is about trying to get you to do this anyway. To be clear, I am not asking that you attempt to change a relationship based on love and affection into one based on dollars without sense; instead, I am merely proposing that you take advantage of current tax rules in order to stretch family finances just a little bit further. Hopefully, the next few pages will change your mind. Of course, if by the end of the article you’re in love with the potential savings but worried about your spouse falling out of love with you as a consequence, not to worry: with the money you’ll be saving, you’ll easily be able to afford a conciliatory trip for two for somewhere special, or to even pay for family counseling if things are particularly frosty.

Ideal Candidates

Many of you who read this article may be better off doing the dishes or taking out the garbage than reading the rest of this column. That’s because this strategy is really suited for a married or common-law couple who have probably already paid down their home and have some extra investable assets. It also probably requires that the spouse with the extra cash be in a higher tax bracket, as the goal of this maneuvre is to shift money that would be taxed at high rates to the hands of a spouse whose current taxable income is significantly less. On the other hand, this strategy isn’t necessarily only for those in their fifties with a stay-at-home spouse. If you fit into any of the following categories, stick around:

  • You’re saving for that first house or are temporarily sitting out the real estate market;
  • One of you just inherited a lot of money and, while you were in the same tax bracket before, the recently bereaved will quickly move up a tax bracket or two if s/he declares all of the investment income and gains on a single tax return;
  • One of you is expecting to be out of the work force for several years, such as when going back to school or raising children;
  • While both spouses are in similar tax brackets, one of you has the ability to park money inside an incorporated business in order to achieve a lower tax bracket; and
  • One of you is planning to retire early and be in a lower tax bracket soon. Do be careful about triggering the OAS clawback, however, if the lower-income spouse is over 65 and might end up with more than about $70,000 in taxable income after the dust settles; and
  • One of you has a lot of unused capital losses from previous investment misadventures that you’d love to use up by transferring more investments into his or her name.

Ultimately, as long as there are significant tax savings by getting more investment income or gains taxed in the hands of the other spouse, read on; the taxes saved may well be your own.

The Rules

According to our friends at the CRA, any income and gains from investments should be taxed in the hands of the spouse who originally owned it in the first place, no matter whose name is now on the investment account. If the wrong spouse is declaring the income, it will be attributed back to the owner spouse. Admittedly, some spouses do bend the rules by owning the assets jointly and sharing the tax bill. Let’s hope the CRA doesn’t look at such couples’ books too closely; anyway, with interest rates as low as they are right now, this is probably not a risk you need to take. Moreover, perhaps you’d be better off trying to transfer more than just 50% of the income and gains to the low-income spouse anyway.

Assuming you’re still reading, here’s how it works. The loaner spouse draws up a promissory note and related documents (just as if the borrower were a business associate rather than the mother of your children). This loan has to be at a minimum rate set by the government or higher, although the rate can be locked in for life. At the current time, the rate is 1% per year and can’t get any lower. The loan can be set up as a demand loan, meaning that it can stay open indefinitely but also be unwound if circumstances change in the future.

If you’re the receiving spouse, you need to actually pay the interest on the loan each year by no later than January 30th of the following year. Don’t skimp on this step: a paper trail can be a wonderful thing. On the other hand, the paying spouse can write off the interest as a deductible expense even though the spouse getting the money must declare it. Assuming you do all of this, you’re off to the races: all income and gains will now be taxed in the hands of the borrowing spouse.

A Few More Considerations

In many cases, spouses considering this strategy already have an investment portfolio. If this is the case, to get the income splitting you want, there are a couple of extra things to know. The best approach is to transfer money rather than shares, even though this means triggering capital gains on your stock winners. In some cases, if your stocks have grown too much, the tax bill might be a deal breaker (unless you’re also selling some other stocks with capital losses you can use to offset the winners). One compromise solution is to hang on to the stocks with the biggest unrealized gains and sell only your lesser picks/losers. Another tip: don’t run afoul of the “superficial loss” rules. In English, this means that if you sell a loser to apply against your gains, neither you nor your spouse can buy it back within thirty days if you want to claim your loss. If you don’t wait, you don’t get to realize the loss, but your spouse is deemed to have purchased the stock at your previous purchase price plus any new purchase costs. In other words, ignoring any commissions, if you sold a stock at $40 that you bought at $60, and your spouse bought it the next day, s/he would be deemed to have also purchased it for $60 even though the current market price is $40. This means the original seller won’t get immediate tax relief, but the other spouse will be able to either claim a loss later on the sale, or have a lower capital gains bill if the stock recovers going forward.

An Example

Although ideas are great, I believe examples are usually even better. Accordingly, let’s assume that Jane Dough has $200,000 in maturing GICs and bonds coming due. She lives in Vancouver and earns $200,000 per year. Her husband John makes $20,000 per year. Assuming the $200,000 earns a 5% return as interest, here is how the story goes:

John declares $10,000 in interest income (or $8,000 after deducting the $2,000 he pays Jane in interest expenses each year). Jane declares the $2,000 she receives from Jack as interest income. Jack is taxed at 20.06%, while Jane is taxed at 45.8%. When the dust settles, Jack pays $1,604.80 in taxes and Jane pays $916, for a total combined bill of $2,520.80. By contrast, if Jane didn’t bother with the loan and earned all $10,000 herself, the tax bill would be $4,580. In other words, by spending perhaps $500 in writing up a spousal loan, this couple would save $2,059 in taxes each year. Of course, these savings can snowball over time if Jack reinvests the money.

If this investment earned $10,000 in dividends instead of interest, the math looks like this: Jack actually gets $684 in tax relief after applying the dividend tax credit, and saves another $401.20 from writing off his investment loan, thus triggering a tax refund of $1,085.20. Jane would still have to pay $916 in taxes on the $2,000 interest payment. Ultimately, they would still be receiving $169.20 in a net tax refund. By way of contrast, if Jane was taxed on the entire $10,000 in dividends, she would pay $2,868 in taxes. In other words, by using the loan, they would save $3,037.20 in taxes. Thus, regardless of whether you are receiving interest or dividends, this strategy can generate enough savings each year for Jane and Jack to take that vacation I talked about earlier, or at least cover airfare if you fly coach and ditch the kids.


Some financial planning strategies are just too complicated to set up or the savings, or are simply not worth the hassle. This may not be one of these situations. While you ultimately may decide this isn’t for you — particularly if the tax bill from selling an existing portfolio is simply too high — some of you will see this as a way of easily and legally cutting the family tax bill each year in exchange for what should be minimal setup costs and only the hassle of writing an interest cheque every January.

In conclusion, if you fall into any of the categories of people who might benefit (described earlier), I would suggest you owe it to yourself to crunch the numbers. It is my hope that the example above will show you how to do just that, combined with access to a tax calculator or marginal rate tax table — both of which can be found at one of my favourite websites: Alternatively, if math is not your friend, check with a financial planner. This might be especially helpful when you’re considering liquidating an existing portfolio. For example, if the higher-income spouse isn’t necessarily in the top tax bracket, it might make sense to sell some of the gains this year and some early next, even if it means setting up separate loans for each chunk of money (should the capital gains savings be large enough to warrant this extra hassle). Finally, as a practical matter, here is one extra tip worth considering: when first broaching this subject with your spouse, don’t forget to splurge on flowers or tickets to a sporting event.

As always, thanks again for any questions, comments or suggestions, including topics for future articles.

4 Comments Post a comment
  1. Chrissy #

    Thank you for this useful article on spousal loans. I have thoroughly researched the topic of spousal loans for investment purposes, and have come up against some conflicting information. All the sources I have come across on the internet (including your site) cite 1% as the current prescribed rate to use for spousal loans. However, when I spoke to CRA and a local accountant, I was told this is incorrect.

    CRA says: the rate should be the base rate of 1% + 4% (this is apparently discussed in the Income Tax Act, regulation 4301). A local accountant I spoke to said: the rate should be the market rate – that is, the same or greater rate as what we could get at a bank, which is in the neighborhood of 4-4.5%.

    When I asked both CRA and the accountant how dozens of reputable law and accounting firms could be so wrong on this point, they couldn’t say. Can you please clarify if there are any tax bulletins or more information about how to arrive at the correct prescribed tax rate for spousal loans?

    September 11, 2017
    • Colin S Ritchie #

      Hi Chrissy,

      Thanks for your email. You’ve obviously put a lot of time into this. I did a bit of quick digging after looking at your message and still am of the view that the 1% rate applies, at least until the end of September, at which time it is possible that the rate goes up in light of recent interest rate hikes. I went to one of my favourite tax sites, and they cited the provisions you noted in your email and reiterated that the rate to use was the same one used for loans to companies, etc.

      I also looked up the regulations you noted and it appears that the prescribed rate, since the loan isn’t being paid to the Receiver General or owed by them, is based on t-bill rates done quarterly. A quick check indicated that those rates have been consistently below 1%. The rate that would apply to money owing to and from the government is the t-bill rates plus 4%.

      Anyway, either the CRA didn’t understand your question or just got it wrong. I’d also disagree with your accountant for the reasons noted above. Ultimately, although just because a lot of educated people say that something is so doesn’t make that the case, but, this time, I think that current public perception that the rate is 1% at this point for spousal loans is the correct one. I hope this helps.,_c._945/page-57.html#h-240

      September 13, 2017
  2. Chrissy #

    Hello Colin,

    Thank you for your quick reply to my comment. You’ve provided a lot of detail and backup info, and it’s given me the confidence to go ahead with our spousal loan. Thanks to your help, I’ve gained a much better understand of spousal loans. I appreciate your time – not only in responding to my comment, but in writing valuable articles like this.


    September 14, 2017
    • Colin S Ritchie #

      Thanks, Chrissy. I’m happy to help and am glad that you’re feeling better about the process. Also, kudos to you for putting the time and effort into taking control of your financial affairs, particularly all the digging around you’ve done on your own to get the answers you need.

      September 15, 2017

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