Get Your Spousal Loan In Place While They’re Hot

When one spouse is in a much higher tax bracket than the other, one income splitting technique to help reduce taxes is to lend a lump sum of money to lower income earning spouse.

By having a formal lending agreement in place, the lower income spouse can start to generate income from the funds at a lower tax rate. This strategy makes more sense than ever right now.

The lower income spouse must pay interest at the prescribed rate to their partner so the interest earned must exceed the interest that has to be paid on the loan. The prescribed rate is at an all time low of 1% making this strategy imperative if you and your spouse are in significantly different tax brackets.

You can even lock in the 1% prescribed rate for life if your loan agreement is set up properly through a lawyer.  Don’t procrastinate on this strategy as it may not last forever at current rates.

Your thoughts and comments are always appreciated.

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3 Responses

  1. How does this arrangement lower the taxable income of the higher-income spouse? Is the loan amount deducted from the total income?
    In the case of joint bank accounts, how does this arrangement work?

  2. Would this be better than pension splitting?

    • It would pretty well have the same effect tax wise as pension income splitting. The difference being that pension income splitting is available to seniors where the spousal loan at prescribed rates is available to all couples.

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