Navigating the complex world of Canadian personal finance can sometimes feel like trying to solve a puzzle with missing pieces. Especially when it comes to managing finances within a marriage or common-law partnership.

One strategy that often comes up in these discussions is the concept of a Spousal Loan. It might sound a bit formal, but it’s essentially a way to potentially split income and reduce your family’s overall tax burden.

If you’re in a relationship where one spouse earns a lot more than the other—and you’re thinking about investing or building wealth together—you’re in the right spot.

In this post, we’ll unpack what a Spousal Loan is, how it works, when it makes sense, and what to keep an eye on.

What Is a Spousal Loan, Exactly?

A spousal loan is a legal strategy in Canada where a higher-income spouse lends money to their lower-income spouse for the purpose of investing.

The idea is that the investment income is taxed at the lower-income spouse’s marginal tax rate rather than the higher-income spouse’s rate.

Sounds simple, right? Well, it’s a bit more nuanced due to the attribution rules in the Income Tax Act—which we’ll get into. But don’t worry, I’ll break it all down.

Why Consider a Spousal Loan?

Let’s walk through an example.
Lynn, an Ontario resident, earns $155,000 a year, while her spouse Kenny makes $35,000. Lynn wants to invest $100,000.

If she puts that money into her own non-registered investment account, any income or capital gains would be taxed at her marginal tax rate—around 44.97%.

But Kenny’s marginal tax rate is only 20.05%. If he could invest that same $100,000, they could save thousands in taxes every year as a household.

But here’s the catch:
If Lynn simply gifts Kenny the money and he invests it, the CRA’s attribution rules kick in. That means any investment income or gains would still be taxed in Lynn’s hands—not Kenny’s. So, no tax savings.

Enter the spousal loan strategy.
Instead of gifting the money, Lynn can lend Kenny the $100,000 at the CRA’s prescribed interest rate. As long as Kenny pays the interest back to Lynn every year on time, the attribution rules don’t apply.

Kenny can then invest the money and be taxed at his lower rate—unlocking that tax-saving opportunity they were after.

The Mechanics of a Spousal Loan

So, how does it actually work? Let’s break it down:

1. Written Agreement
First things first—you need a formal written loan agreement. This should outline the loan amount, the interest rate, the repayment terms, and any other key details. Think of it like a contract between two business partners—it helps legitimize the whole setup in the eyes of the CRA.

2. Prescribed Interest Rate
The loan must charge interest at the CRA’s prescribed interest rate, which is updated every quarter. This rate is usually quite low—as of April 2025, it’s 4%—making the spousal loan setup a bit less attractive than in previous years. You can always check the current rate on the CRA’s website.

3. Interest Payments
The borrower (in our example, Kenny) must pay interest to Lynn by January 30th of the following year—every year. This deadline is non-negotiable. Miss it even once, and the CRA’s attribution rules will apply forever. No do-overs.

4. Actual Investing by the Borrower
Kenny (the lower-income spouse) needs to actually invest the borrowed money and earn income from it. It can’t just sit in a savings account doing nothing.

5. Interest is Taxable to the Lender, Deductible to the Borrower
Here’s an important detail: Lynn must report the interest payments she receives as income on her tax return. Meanwhile, Kenny can deduct those interest payments from his investment income, which helps reduce his taxes.

Real-Life Example: The Numbers

Let’s do some quick math based on Lynn and Kenny’s situation.

• They decide to set up a Spousal Loan.
• Lynn loans Kenny $100,000 at the CRA’s prescribed interest rate of, say, 2%.
• Kenny invests it and earns 9% annually in capital gains.
• He pays $2,000 (2%) to Lynn each year.
• Lynn reports the $2,000 as income and pays tax on it at her marginal rate of 44.97%.
• Kenny earns $9,000 and deducts the $2,000 interest he pays Lynn.

If Lynn had invested the $100,000 herself, she’d be paying tax on $4,500 (half of the capital gains) at her marginal rate of 44.97%, which comes out to $2,023.65.

Instead, Lynn lent the $100,000 to Kenny and earned $2,000 in interest. Her tax on that interest income would be:

$2,000 × 44.97% = $899.4

Kenny, on the other hand, earned a $9,000 capital gain. He can deduct the $2,000 in interest paid to Lynn as an expense. That means he’s taxed on $4,500 (half the capital gain) minus the $2,000 interest deduction, at his marginal rate of 20.05%:

($4,500 – $2,000) × 20.05% = $501.25

So, the total additional household tax in the spousal loan scenario would be:

$899.4 (Lynn) + $501.25 (Kenny) = $1,400.65

That compares to $2,023.65 if Lynn had just invested herself — resulting in an annual tax savings of $623.

At the prescribed rate of 4% as of April 2025, the tax savings from setting up a spousal loan would be minimal — and that’s before considering any legal or administrative costs upfront.

When Is a Spousal Loan a Good Idea?

A spousal loan isn’t a one-size-fits-all solution, but it can be a smart move when:

• One spouse earns significantly more than the other.
• A spouse is starting a business and needs capital.
• Both spouses have already maxed out their RRSP and TFSA contributions.
• The CRA’s prescribed interest rate is relatively low.
• The goal is to invest for the long term (so the setup and legal costs are worth it).
• You want to legally lower your family’s overall tax bill.

What Investments Work Best with a Spousal Loan?

A spousal loan works best when used for investments that generate taxable income, such as:

• Dividend-paying Canadian stocks
• Bond ETFs
• REITs (Real Estate Investment Trusts)
• Mutual funds with regular distributions

You wouldn’t use a spousal loan to fund a TFSA or RRSP, since those accounts are already tax-sheltered—there’s usually no need to shift income.

Capital gains are also a great fit. Not only are they taxed more favorably than interest or dividends, but they also give you more room to benefit from the lower-income spouse’s tax bracket.

Benefits of a Spousal Loan

The primary benefit of a spousal loan is income splitting. By shifting investment income from a higher-income spouse to a lower-income spouse, you can reduce your family’s overall tax burden.

This strategy is especially useful if one spouse is self-employed, starting a business, or has variable income.

Here’s what makes spousal loans so appealing:

• Tax Savings: The biggest win. By paying tax at a lower marginal rate, the household keeps more of its investment income.
• Investment Opportunities: You can make use of tax-inefficient investments (like dividend stocks or REITs) in a way that’s more tax-friendly.
• Financial Flexibility: The lower-income spouse gains access to funds for investing or launching a business—without triggering the CRA’s attribution rules.

Let’s look at another scenario:
Lynn is a high-income professional, and her husband Kenny wants to start his own consulting business. Instead of gifting him the money—which would lead to attribution—Lynn sets up a spousal loan. Kenny uses the funds to invest in his business. Since he’s in a lower tax bracket, the income he earns is taxed more lightly—freeing up more capital to grow his venture.

Related content:

• The Smith Manoeuvre: A Comprehensive Guide to Tax-Deductible Investing

Potential Pitfalls and Considerations

While a spousal loan can be a powerful tax-saving tool, it’s not without its potential pitfalls. Here are some critical considerations:

• CRA Scrutiny: The CRA closely monitors spousal loans to ensure they’re legitimate. Any deviation from the prescribed rules can lead to the loan being reclassified as a gift, triggering the attribution rules and wiping out the tax savings.
• Interest Rate Fluctuations: The prescribed interest rate set by the CRA can change every quarter. This means your interest payments may fluctuate, impacting your overall costs.
• Relationship Dynamics: Mixing finances with a partner can be tricky. If the relationship ends, the loan becomes an enforceable debt, which can complicate things. Clear agreements and open communication are key to preventing misunderstandings or conflicts.
• Upfront Legal Costs: This could cost a few hundred dollars, so be sure the long-term savings justify the expense.
• Administrative Burden: Keeping track of the loan details, maintaining proper documentation, and ensuring timely interest payments requires diligence and attention to detail.

Consider this cautionary tale:
Kenny and Lynn set up a spousal loan, but they didn’t create a formal written agreement. They also missed a few interest payment deadlines. When the CRA audited them, they deemed the loan a gift, leading to a hefty tax bill. This highlights just how crucial it is to stick to the CRA’s rules.

How to Set Up a Spousal Loan Step-by-Step

Here’s a simplified guide if you’re considering a spousal loan:

1. Decide on the loan amount: Typically, this is cash or non-registered assets that the higher-income spouse already owns.
2. Check the current prescribed interest rate: Visit the CRA website to find the latest quarterly rate.
3. Draft a formal loan agreement: Work with a lawyer or accountant who is familiar with spousal loans to ensure everything is legally sound and to avoid costly mistakes.
4. Transfer the funds: The transfer should be clearly documented (e.g., via e-transfer or cheque, not just by moving funds between joint accounts).
5. Lower-income spouse invests the funds: Make sure the funds are invested in a separate non-registered account in the lower-income spouse’s name.
6. Pay annual interest: The borrower must pay the lender interest every year by January 30th of the following year to avoid attribution.
7. Report income correctly on taxes: The higher-income spouse claims the interest as income, while the borrower can deduct it against their investment income.

Spousal Loan vs. Other Income Splitting Strategies

Canada doesn’t offer many generous income splitting options—but there are a few alternatives worth knowing:

Strategy	Tax Savings Potential	Ease of Use	Best For
Spousal Loan	High	Medium	Large taxable investments
Pension Income Splitting	Medium	Easy	Retirees over 65
RESP Contributions	Low to Medium	Easy	Families with kids

Spousal loans are the most flexible and powerful option before retirement, especially for high-income earners with excess capital.

What If You’re Common-Law?

Good news: Spousal loans apply to legally married and common-law partners in Canada.

As long as the CRA considers you common-law (you’ve lived together for 12 months in Ontario or have a child together), you can use this strategy.

Just make sure the paperwork is tight—it doesn’t matter if you’re married or not; what matters is CRA compliance.

Conclusion: Is a Spousal Loan Right for You?

A spousal loan can be a valuable tool for income splitting and tax planning in Canada. However, it’s crucial to understand the rules and regulations before proceeding.

If you’re considering a spousal loan, take the time to consult with a professional to ensure you comply with all CRA requirements.

With careful planning and execution, a spousal loan can potentially reduce your family’s overall tax burden, helping you achieve your financial goals more efficiently.

Whether you’re starting a business, investing, or planning your estate, a well-structured spousal loan could be the missing piece to optimizing your financial strategy.

Have you or someone you know used a spousal loan strategy? Did it work out? Drop a comment below or reach out—I’d love to hear your story.