Skip to main content
Access every election story that matters
Enjoy unlimited digital access
$1.99
per week for 24 weeks
Access every election story that matters
Enjoy unlimited digital access
$1.99
per week
for 24 weeks
// //

Tim Cestnick is president of WaterStreet Family Offices, and author of several tax and personal finance books. tcestnick@waterstreet.ca

My friend Greg is thinking about what to get his wife, Janine, for Christmas. Since I've made some mistakes in my time, he approached me for advice. "Tim, is it okay for me to give her cash for Christmas?" Greg asked. "Greg, that's fine if your New Year's resolution is to sleep on the couch throughout 2014," I replied. "Giving her cash is a terrible idea. I'd lend it to her instead," I suggested.

You see, I knew that Greg is trying to get cash into Janine's hands so that she can invest the money. He wants to take advantage of her lower tax rates on the income she'll earn. "For the record," I continued, "appliances, cash and loans are off limits as presents. Go buy her some golf clubs. Just make sure they also fit you so that you can borrow them regularly – it's very practical."

Story continues below advertisement

As for lending Janine money to invest, the idea has merit – but only if the conditions are right, as they are for Greg and Janine. Let me explain.

The idea

It's possible to move cash into the hands of your lower-income spouse so that he or she faces tax on the investment income at lower rates than you. But the "attribution rules" in our tax law will prevent you from simply gifting that cash to your spouse. If you do this, any income earned on the money will be attributed back to you and taxed in your hands.

To get around this problem, you can lend your spouse the money and charge the prescribed rate of interest. The interest rate can be locked in indefinitely at the time you set up the loan. The good news? The prescribed rate is due to drop once again to just 1 per cent on Jan. 1, 2014 (the rate has been 2 per cent since Oct. 1, 2013).

The idea is that your spouse can invest the money, earn income, pay you the interest charge owing, and face tax on the balance of the income at his or her lower rates (hence you'll save tax as a couple). Your spouse will have to actually pay you the interest every year by Jan. 30 for the prior year's interest charge.

Now, many Canadians have set up spousal loans to split income. Some aren't reaping the rewards they expected, so let me share an example of when this idea might not work so well.

The problem

Story continues below advertisement

If the conditions aren't right, your tax savings from this strategy might not be worth the effort. Suppose, for example, that you lend your spouse $50,000 on Jan. 1, 2014. Suppose also that she can earn 5 per cent, or $2,500, in 2014 on that money. If you charge the prescribed rate of 1 per cent on the loan, she'll pay you $500 in interest. You'll face tax on that interest, but she can deduct it. So, she'll face tax on the net amount of $2,000 ($2,500 in income less the $500 interest deduction).

Suppose you would have faced tax on that income at 45 per cent (your marginal tax rate) but she'll face tax at 35 per cent (her marginal tax rate). The total taxes saved, then, will be the $2,000 taxed in her hands multiplied by 10 per cent (the difference between your tax rate and hers), for a total of $200 in tax savings. Is all of this really worth $200 in tax savings? You decide. Many would say it's not worth the hassle.

Further, suppose that your spouse didn't earn any income on the $50,000 because she invested for long term-growth, not income. You'd still face tax on the $500 interest charge, and she'd have to come up with the $500 to pay you. Only when capital gains are realized would you experience the benefit of a tax bill in your spouse's hands rather than yours.

The moral

Lending money to your spouse can make sense, but likely only when:

  • (1) You’re lending a significant amount; (perhaps in the hundreds of thousands);
  • (2) the difference between your marginal tax rates is great; (perhaps 15 to 20 per cent or more); and
  • (3) you’re investing for income (perhaps the fixed-income portion of your portfolio).

The idea can also make sense in the less common situation where you're investing for growth and expect your capital gains to be very significant (by perhaps, investing in a private business or opportunistically in real estate). The bottom line? Don't assume a spousal loan is worth the while until you do the math on the potential tax savings.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies