The CRA has smiled upon the Canadian tax payer. In January 2014, the spousal loan rate will drop from 2% back to 1%. This should significantly increase the number of households who utilize this income splitting strategy. What is income splitting, you ask?
Income splitting is a tax savings strategy granted to Canadian households with income inequality. In a nutshell, the higher income earning spouse uses CRA benefits to lower his/her taxable income to ultimately lower the household tax bill.
In order to execute a spousal loan, there must be a documented flow of cash from the higher income spouse to the lower income spouse. The rate must be, at minimum, the prescribed rate set by the CRA (1% as of January 2014). The purpose of the spousal loan is to pass on taxable investment earnings to the lower income earner. The lower income earner must pay the higher income earner interest on the loan, but can write off the investment loan interest. For an example please click here.
Speak to one of our financial planning advisors today, to see if this strategy makes sense for you.
