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Consider a spousal loan before the rate changes

Given that we’ve seen interest rates fall to historical lows, and there’s talk now about higher rates in the future, the window of maximum opportunity may be closing.

As a Client Portfolio Manager, Russ draws on his years of experience and professional network to help clients align their portfolio to their goals and objectives. He also serves as a sounding board for broader wealth issues.

Spousal loans can be an efficient tax planning strategy to help reduce a household’s net tax bill. Given that we’ve seen interest rates fall to historical lows, and there’s talk now about higher rates in the future, the window of maximum opportunity may be closing.


Let’s review the basics of a spousal loan. According to CRA guidelines, you cannot simply give your spouse a large sum of money so they can claim the income on that money in the hopes of paying less tax.


For example, if one spouse has $1,000,000 in their personal investment account and are in the highest marginal tax bracket in Alberta, they would pay 48% tax on any interest income, 34.31% tax on any eligible dividends, and 24% tax on any capital gains. Their spouse, on the other hand, may be in a lower tax bracket, where instead they might be closer to 25% on interest income, 2.57% on eligible dividends, and only 12.50% tax on capital gains.


The CRA has attribution rules which prevent people from simply shifting money between spouses to take advantage of the person’s lower tax bracket. But a spousal loan is one CRA-approved way that you can allocate money into the lower taxed spouse’s name to take advantage of their lower tax bracket.


Through a spousal loan, the higher-taxed spouse loans money to the lower-taxed spouse using the government of Canada’s prescribed rate at the time. Then, going forward, the lower taxed spouse can claim the income from the borrowed money at their respective tax rate, effectively lowering the household’s tax.


Each year, the borrower must pay interest to the lender at the prescribed rate when the loan was initiated, and the borrower can claim this interest expense as it is being used for investment purposes. The lender, on the other hand, must claim this interest payment as income each year. To make the loan compliant with CRA guidelines, a formal loan is arranged using the government of Canada’s prescribed rate at the time (which is currently at 1.00%).


In Figure 1 below, we assumed the higher-taxed spouse lent $1,000,000 to the lower-taxed spouse and invested the money into an equity-weighted portfolio of 75% Canadian equities, and 25% fixed income (see footnote for assumed rates of return).


As you can see, the spousal loan netted the couple an extra $4,732 in after-tax income. The strategy looks even more compelling when you add up this benefit over time. Over a 15-year period, it could mean more than $70,000 of additional after-tax money for the couple (not including any compounding of the additional tax saved money).

Figure 1: Tax rates with and without spousal loan 
 $1,000,000 Without Spousal Loan$1,000,000 With Spousal Loan
 High EarnerLow EarnerHigh EarnerLow Earner
Investment Income1$36,875$36,875 
Spousal Loan Interest Payment2-$10,000 -$10,000 
Taxes Payable-$10,244-$4,800 -$712 
After-Tax Income$26,631$5,200 $26,163 

Source: CWB McLean & Partners 

 Assumes 75% equity, 25% fixed income with a 6.50% annualized return. Canadian equities with 8% annual return (3% dividend, 5% capital gain realized at 25% per year), 25% in fixed income with 2% annual.
2 Loan interest is reported as taxable income by the lending spouse and is tax deductible for the borrowing spouse.


Additional After-Tax Income
One year $4,732
Five years $23,660
Ten years $47,320
Fifteen years $70,980

As mentioned earlier, the prescribed rate is an important component to a spousal loan when determining the viability of the strategy. The prescribed rate is set each quarter by the government of Canada, which takes the average three-month treasury bill yield of the first month of the preceding quarter, and rounds up to the next highest whole percentage point.

For the quarter beginning April 1, 2022, the rate will remain unchanged at 1.00%, where it’s been since July 1, 2020 as shown in Figure 2. However, with the Bank of Canada poised to start raising rates, we could see the prescribed rate change in the not-too-distant future.


This is important because for anyone who establishes a spousal loan at the current 1.00%, it will be locked in for the life of the loan and cannot go higher even if the prescribed rate increases in the future. Also, for anyone with an existing spousal loan at the 1.00% level, they may want to review if adding to the loan would be beneficial before the rates go up.


Figure 2: Prescribed rates for the past 20 years

Source: Government of Canada (CRA)

If there’s a significant difference in the marginal tax rates for you and your spouse, a spousal loan may be worth considering. Before committing to this, you’ll want to look at the investment account associated with the spousal loan and consider your overall investment strategy, to help maximize the tax benefits while maintaining the appropriate overall asset allocation.


Many of our advisors have deep expertise in tax strategy, and would be happy to discuss any spousal loan queries you have. Please fill out the form below to have one of our experts reach out to you.