In April 2009, the Canada Revenue Agency (CRA) lowered the rate at which spouses can lend money to each other to 1%. This is the lowest rate in recent history and has provided Canadians with a compelling opportunity to minimize personal income taxes if a high earning spouse has non-registered funds available to lend to a lower earning partner.
On April 1, 2018, it is expected that the CRA will double the inter-spousal loan rate from 1% to 2%. We recommend that clients consider making use of this income splitting strategy before the April 1 deadline in order to maximize tax savings.
Below is an example involving a $1 million inter-spousal loan which results in $19,800 of annual tax savings if completed before April 1 (versus $16,500 of annual tax savings if completed after April 1). This example assumes a 7% pre-tax rate of return on investment:
Given the difference in spousal tax rates above and the difference between the rate of return on investment and CRA’s prescribed rate, spousal loans enable a high income spouse to shift income to his/her lower income spouse, thereby reducing total taxes paid. In the example above, if the loan were outstanding for ten years, a couple implementing this strategy prior to April 1 would save $198,000 in taxes over the term of the loan.
Once the loan is initiated, future increases in the CRA prescribed rate will not impact the interest rate of the loan which would remain fixed at 1%. We encourage investors to evaluate whether this strategy makes sense for them before the CRA rate increase on April 1.
There are also tax strategies available to shift income to family trusts or children in similar ways. We would be pleased to discuss this income splitting strategy with you in consultation with your tax advisors.