By Gigi Suhanic
National Post
FP Money Section
Saturday, July 31, 2004
Question: I've heard I can make a loan to my spouse. Is that true and how can I go about doing that?
Adrian Mastracci, investment counsel at Vancouver’s
‘fee-only’ KCM Wealth Management, says, “The time is ripe for inter-spousal loans because the prescribed rate is at a low 2%. If anybody is going to do it, this is the time to do it. It's the lowest it's been [since the second quarter of 2002]. Last quarter it was 3%.”
Answer: You are allowed to make a loan to a spouse, including a common-law partner. This can be very beneficial for couples, particularly when one member of the unit makes most of the money and, consequently, pays most of the taxes.
Adrian Mastracci, investment counsel with KCM Wealth Management in Vancouver, says if you are pondering doing this, now is a good time to assess the benefits for your situation.
When one spouse makes a loan to another, tax rules require that the recipient pay a prescribed interest rate to the loaner as set by the Canada Revenue Agency. The reason Mr. Mastracci thinks the time is ripe for inter-spousal loans is because the prescribed rate is at a low 2%.
"If anybody is going to do it, this is the time to do it," says Mr. Mastracci. "It's the lowest it's been [since the second quarter of 2002]. Last quarter it was 3%."
Generally, this tactic is employed to allow the loan recipient to invest the amount -- hopefully receiving a return greater than 2% -- and paying taxes on the investment income at a lower marginal rate.
A few key points include the fact that there are no deadlines by which the loan must be repaid. If there is already a loan outstanding between two spouses, it can be paid off and new loan made.
There are some other rules, however, besides the payment of the 2% rate. Interest must be paid each year by Jan. 30 following the year in which the loan was made. The spouse making the loan must declare the interest as income on his or her tax return. Documentation of the loan, such as with a promissory note, is suggested.
But the 2% deal has a best-before date. The CRA sets the prescribed rate every quarter and Mr. Mastracci believes that when the officials meet to review the rate for the fourth quarter, they will raise it, possibly to 3%. In this case, the 2% will only be good until Sept. 30.
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