Spousal Loans


Spousal Loans

Prescribed interest rate for Spousal Loans will likely increase to 2% for Q2 2018

February, 2018

The Canada Revenue Agency (CRA) updates the prescribed interest rate for spousal loans on a quarterly basis based on the Bank of Canada’s economic outlook and its impact on key interest rates (rounded up to the next whole percentage). As of January 23, 2018, the three-month Treasury Bill posted an average yield of 1.20%. While the rate change has yet to be announced for Q2 of 2018, based on the Treasury Bill average, it is expected that the prescribed rate will be increased to 2% from its current 1% in April.

Spouses can continue take advantage of the existing prescribed rate of 1% by setting up a spousal loan before April 1, 2018.

What is a spousal loan?

A spousal loan is an income splitting strategy that transfers investment income from a higher income earner to the lower income spouse to reduce the total income tax paid in the family.

This strategy works if the income earned on the invested assets is greater than the interest cost on the loan. The CRA allows for a “prescribed” interest rate to be used for these low interest loans.

Note that any prescribed rate loans (including spousal loans) that are already in place will not be affected by a rate change. These loans are grandfathered at the rate in effect at the inception of the loan. Clients who are currently considering a prescribed rate loan or are in the process of implementing one should complete this prior to the end of March 2018. 

One of the advantages of the spousal loan strategy is that the spouse’s loan can be locked-in at this prescribed rate for an indefinite period of time. The promissory note should indicate that the loan can be repaid at any time, permitting flexibility should circumstances change. In this way, an existing loan arrangement at the current 1% interest rate could be locked-in and continue to help families with an effective after-tax cash flow strategy.

It’s important to document the loan with appropriate terms and conditions in order to satisfy CRA requirements. If properly set up, the income on the loan and its associated tax liability will be taxed in the hands of the spouse in the lower tax bracket without triggering the attribution rules. One of these conditions requires the loan interest to be paid to the spouse who loaned the funds by January 30th of each year. So if you already have a spousal loan arrangement in place, make sure to pay the interest to your lending spouse before the deadline.

Interested in reading more about spousal loans?

For more information on the spousal loan strategy and how it may help reduce taxes for your family, contact us for a copy of our complimentary education article on the topic.

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