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What are the Tax Implications with a Spousal Loan?

tax implications of a spousal loan cra rules

Perhaps you are the higher income earner in your family, or your spouse doesn’t earn any income at all. Yet you are still paying a hefty tax rate because of the income bracket you are in.

You may want to think of splitting that income which would allow you to transfer some of the money that you are earning on your invested assets by way of a spousal loan. This will only work if you will be paying less on interest for the loan compared to the tax amount you are paying on this investment money. Your spouse can then invest this money making sure that the investment returns are going to be more than what you are paying in interest.

This is a perfectly legal transaction in the eyes of the CRA if done properly and they will allow you to use the prescribed interest rates for the loan. After January 1, 2014 the prescribed rate accepted was changed back to 1%.

You will need to draft up a promissory note. The actual loan doesn’t have to have a definite payback date, but the note should indicate that the loan can be repaid at any time. It may be that you have done a spousal loan in the past at the 2% rate. If you have a note in place for that one that states you can repay the loan back at any time, then you may want to do that, then renegotiate a new one at the reduced rate of 1%.

Remember that the CRA has strict rules that govern the tax obligations of every tax payer. You want to be sure that this loan is well documented. Your spouse will now be responsible for paying the tax on the interest earned on this loan, but it won’t trigger the attribution rules. One rule you do need to abide by is that the interest on the loan be paid to your spouse by the end of each year.

This tax saving option is just one of many methods of strategic tax planning that a quality Toronto Accountant can guide you on. Saving money on taxes is important and can be done by making sure that you are taking advantages of all the potential tax credits that may be available to you, and then incorporating tax planning strategies that may take a little work but are well worth it, but must be done in compliance with the CRA regulation.

 

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Sam Seidman, CPA, CA, LPA
629 Sheppard Avenue West
Toronto, Ontario
M3H 2S3

Telephone: (416) 398-1700
Fax: (416) 398-6226

Chartered Professional Accountant, Chartered Accountant, Licensed Public Accountant

Email: sam@torontoaccountant.ca

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The information provided here and throughout the site of TorontoAccountant.CA is intended for general tax information only, and should not be misconstrued as a legal source of information regarding your tax situation, or be used for any other purposes other than for general information.
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