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How to Lend Money to Your Spouse for investments, without adverse tax impact?

Normally if money is loaned to a spouse for acquiring an income producing property, any income or gain of that would be attributed back to person lending the money. However, if planned properly, it can result in tax savings for the family.

Where one spouse is in a lower tax bracket as compared to other, it may be beneficial to lend money to the lower-income spouse. The borrowed funds can be used to purchase investments, and tax on the investment income will be paid by the lower-income spouse at a lower marginal rate. 

To achieve the tax savings, a promissory note should be written for the loan, with the interest rate and principal amount specified.  Interest must be paid on the loan by January 30th of each following year.  In order for attribution rules to not be applied, the interest rate charged must be at least equal to the prescribed rate set by the Canada Revenue Agency (CRA) at the time the loan is made.

Borrowed funds should be invested in a separate investment account in the borrower's name.

The lender must include the amount of interest received in his/her income. Interest paid by the borrower is deductible as carrying charges, as long as a loan agreement has been drawn up so that there is a legal obligation for the borrower to pay the interest.

Interest must be actually paid by January 30 of the following year. One default in interest payment can nullify the arrangement for all future years.

For further information, feel free to contact: 

Anil Sharma, B.Comm(Hons), CPA, CGA

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Above article is for general information purpose only. Readers should not rely on or use the information provided as a basis for a course of action without first obtaining the appropriate professional advice

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