Author Topic: Lending capital to your spouse for income splitting  (Read 2452 times)

scottish

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Lending capital to your spouse for income splitting
« on: November 24, 2019, 05:38:41 PM »
Is anyone doing this?     I've been studying the different scenarios to see where this could be to our advantage, and I think I've found one.

I'm wondering if there's a standard set of documentation to use regarding the size of the loan, the agreed (i.e. CRA proscribed)interest rate, when interest payments are made and so on.

SwordGuy

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Re: Lending capital to your spouse for income splitting
« Reply #1 on: November 24, 2019, 07:08:25 PM »
In the US, a loan isn't considered "income" because it has to be paid back.   

So if I give someone a loan from my income, I'm still on the hook for taxes on the full amount.  Is it different in Canada??


If the loan is forgiven in some manner, then the amount that was forgiven is considered their income and taxed.    The person who isn't getting their money back has a loss that can be used to offset taxes on other income.

Malkynn

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Re: Lending capital to your spouse for income splitting
« Reply #2 on: November 25, 2019, 06:09:01 AM »
I don't understand.

You want to loan your spouse money to lower your taxable income?

That doesn't make sense...

scottish

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Re: Lending capital to your spouse for income splitting
« Reply #3 on: November 25, 2019, 03:35:04 PM »
I can loan DW capital.   Income she makes from the capital is taxed in her hands.

She has to pay me interest on the loan at a rate proscribed by the CRA.   The interest is taxed in my hands.

In our scenario, DW stopped working when DD and DS were born 20 years ago and never started again.    We've been splitting our investments using TFSAs and spousal RSPs.    However, I have enough income to have built up a substantial non-registered portfolio as well.     I pay mucho tax on any investment income in the non-registered portfolio because of my high marginal tax rate.

This is a convoluted form of income splitting that avoids attribution rules in Canada.  (which probably means that annoying Morneau guy will try and eliminate it)    I should have explained in more detail in my first post, but I thought the method was well known.

Malkynn

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Re: Lending capital to your spouse for income splitting
« Reply #4 on: November 25, 2019, 03:52:25 PM »
I can loan DW capital.   Income she makes from the capital is taxed in her hands.

She has to pay me interest on the loan at a rate proscribed by the CRA.   The interest is taxed in my hands.

In our scenario, DW stopped working when DD and DS were born 20 years ago and never started again.    We've been splitting our investments using TFSAs and spousal RSPs.    However, I have enough income to have built up a substantial non-registered portfolio as well.     I pay mucho tax on any investment income in the non-registered portfolio because of my high marginal tax rate.

This is a convoluted form of income splitting that avoids attribution rules in Canada.  (which probably means that annoying Morneau guy will try and eliminate it)    I should have explained in more detail in my first post, but I thought the method was well known.

lol, yeah, that wasn't at all clear from your initial post.
You tend to know your stuff though, which is why I was so confused by what it sounded like you were asking.

I think you hit the nail on the head though, I think the risk is in potential policy changes that could work against you. As someone who works in finance with medical professionals, I saw a lot of incorporated professionals lose their shit over the recent policy changes.

Just how large a margin are you looking at in terms of benefit here?

Mighty Eyebrows

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Re: Lending capital to your spouse for income splitting
« Reply #5 on: November 25, 2019, 10:48:33 PM »
Scottish, it sounds like you know what you are doing. I am not an expert, but my understanding is that you just need to be very careful about documentation and actually make proper interest payments in a way that you can point at for CRA. January 30th is an important payment date for interest. I have not heard of a limit on the size of loan and I have not found a "standard" set of documents.

https://www.taxtips.ca/personaltax/lend-to-spouse-child.htm
https://www.financialwisdomforum.org/forum/viewtopic.php?f=32&t=114368

It looks like you are already using a Spousal RRSP (although your spouse is not working so there probably isn't much room). You probably also know that you can give her money to put in her TFSA, as long as she doesn't remove it and put it in a taxable income-generating investment.

https://www.finiki.org/wiki/Income_splitting

Malkynn, the prescribed interest rate is currently 2%, but was down to 1% for a while. The return on a balanced portfolio is usually high enough that it a decent way to move some income to the lower-taxed person. What the Federal Liberals do next for taxes is anyone's guess. I am worried about the Capital Gains inclusion rate, but more because of a business property we are trying to sell.

https://www.canada.ca/en/revenue-agency/services/tax/prescribed-interest-rates.html

scottish

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Re: Lending capital to your spouse for income splitting
« Reply #6 on: November 26, 2019, 07:37:45 PM »
^*&^@# it!   I missed the 1% loan rate!

Both our TFSAs and RSPs are maxed out.   That one was so obvious I couldn't miss it.

The "loaning your spouse money to invest" thing is quite a bit more complicated.     If I'm happy with the numbers, I'll probably have to get advice from an accountant who specializes in this stuff.     There are a lot of factors that are hard to predict here - rate of return on the investments, changes in tax policy, when I FIRE,  how long we live...   so I'm trying to be thorough before I commit to anything.

Malkynn

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Re: Lending capital to your spouse for income splitting
« Reply #7 on: November 26, 2019, 07:46:48 PM »
^*&^@# it!   I missed the 1% loan rate!

Both our TFSAs and RSPs are maxed out.   That one was so obvious I couldn't miss it.

The "loaning your spouse money to invest" thing is quite a bit more complicated.     If I'm happy with the numbers, I'll probably have to get advice from an accountant who specializes in this stuff.     There are a lot of factors that are hard to predict here - rate of return on the investments, changes in tax policy, when I FIRE,  how long we live...   so I'm trying to be thorough before I commit to anything.

Let me know if you need a referral for someone who can handle this kind of thing in Ottawa, it's the type of move that can easily go sideways with bad advice.

Missy B

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Re: Lending capital to your spouse for income splitting
« Reply #8 on: December 10, 2019, 08:51:23 AM »
For those of us who had no clue what the OP was talking about (it's a little dated, interest rate is now 2% as previously noted):

https://turbotax.intuit.ca/tips/one-way-to-split-income-with-your-spouse-a-spousal-loan-2391