Prescribed-rate loan for funding spouse account

CRA attribution rules mean that you can not just give a lower-income spouse money to invest in a taxable account such that the investment returns are taxed at a lower rate. The returns would instead be attributed back to the gifter and taxed at higher rates. You can however lend the money to a lower-income spouse. The spouse must pay interest on the loan by January 31 of each year to avoid attribution rules, and the interest rate must be no lower than the prescribed rate of interest determined by the CRA at the time the loan is set up. There must be a formal loan agreement or promissory note that is legally enforceable and other requirements, so to take advantage of this income-splitting strategy you may need to consult with a tax advisor. The borrower can then invest the loan proceeds and the returns of the investments will then taxed in their hands. Since the loan is meant to earn investment income, the interest on the loan is tax-deductible for the borrower. The lender will pay tax on the interest earned, but the prescribed rate of interest is currently only 1% per year, and that is fixed for the length of the loan agreement even if the prescribed rate changes in the future.

If you have a spouse, you can add a `Spousal prescribed rate loan from the LOANS drop-down menu. The borrower can be you or your spouse. You will then be asked which account, from the borrower's non-registered accounts, was used to invest the loan proceeds (it must already exist, and the beneficiary set to `Spouse'. It can have zero balance, but set up investments and asset allocations). We ask for the amount of the loan in the account currency, the rate of interest, a start date and an optional end date.

If the start date is in the future, the TIME MACHINE will take the funds from the lender and deposit them into the account, otherwise, we assume the borrowed funds are already in the account. It will consider the loan as interest-only, with the interest payable as a tax-deductible expense to the owner of the account (the borrower), and as taxable income to the lender. If the end date is reached before the death of either spouse, the loan principal will be paid back to the lender from the funds in the account. If there are not enough funds, an expense will be added for the borrower. If there is no end date, the loan will continue until either spouse dies, at which point the loan will be forgiven, and the account will be rolled over to the surviving spouse if not the owner.