Spousal loans in Canada: how a loan to your partner can cut your tax bill

"Spousal loan" means two very different things, and people mix them up constantly. One is a precise tax-planning move — a loan to your lower-income partner that legally shifts investment income off your higher-income tax return. The other is just lending your husband, wife, or common-law partner money for ordinary life. Both are worth understanding, and both work far better written down. This guide covers the tax version in detail, then the everyday one.

The tax-planning spousal loan, in one paragraph

Canada taxes higher incomes at higher rates. If a high-earning spouse simply gives their lower-earning spouse money to invest, the CRA's attribution rules tax the resulting investment income right back in the high earner's hands — the splitting attempt fails. But the Income Tax Act carves out an exception: if instead of gifting, you lend the money at the CRA's prescribed interest rate and follow the rules to the letter, the investment income is taxed in the lower-income partner's hands at their lower rate. Over years and large balances, the saving can be meaningful.

How it actually works, step by step

1. The higher-income partner lends a lump sum to the lower-income partner — often to a non-registered investment account.
2. Interest is charged at the prescribed rate in effect on the day the loan is made. That rate is then locked in for the entire life of the loan, even if the CRA's rate rises later.
3. The borrowing partner invests the money and earns dividends, interest, or capital gains.
4. Each year the borrower pays the interest owed to the lender — and must do so by January 30 of the following year.
5. The lender reports that interest as income; the borrower deducts it against their investment income and pays tax on the net at their lower rate.

The net effect: the investment return (minus the small prescribed-rate interest) is taxed at the lower-income partner's bracket instead of the higher one. The bigger the gap between the two partners' tax rates, and the larger the invested sum, the more the couple keeps.

The two rules that make or break it

Almost every failed spousal loan fails on one of these two points. Get them right and the strategy holds; miss either and the CRA attributes the income straight back to the lender.

1. Charge at least the prescribed rate — and lock it

The loan's interest rate must be no lower than the CRA's prescribed rate at the moment the loan is made. The reassuring part is that this rate is fixed for the life of the loan: a loan made while the rate is 3% stays a 3% loan even if the prescribed rate later climbs. The frustrating part is the reverse — you generally can't just rewrite an old, higher-rate loan down to today's lower rate. The CRA's position is that amending or refinancing an existing prescribed-rate loan to chase a lower rate doesn't work; if you want the lower rate, the usual route is to sell the investments, repay the original loan in full, and start a genuinely new loan.

2. Pay the interest by January 30 — without fail

This is the one that catches people. For each year the loan is outstanding, the borrowing partner must actually pay the interest owed to the lender by January 30 of the next year. Not accrue it, not net it off — pay it, ideally by a traceable transfer. Miss the deadline in a single year and the exception is lost: the investment income is attributed back to the lender for that year and every year afterward, permanently, for that loan. The only remedy is to unwind and set up a new loan.

A quick example

Suppose the higher-income partner lends $250,000 to the lower-income partner at a 3% prescribed rate. The borrower invests it and earns 7% — $17,500 in a year. They owe $7,500 in interest to the lender (3% of $250,000), paid by January 30. That $7,500 is taxable to the lender and deductible to the borrower, leaving roughly $10,000 of net investment income taxed in the lower-income partner's hands rather than the higher one's. If their marginal rates differ by, say, 20 percentage points, that's about $2,000 of tax saved in a single year — repeating annually while the loan runs. (Illustrative only; your numbers and rates will differ.)

Going deeper: the questions people actually run into

Once the basic idea clicks, a few sharper questions tend to follow — the kind that decide whether the strategy is worth it for your specific situation. Here are the ones that come up most.

Who pays tax on the interest — and where does the payment come from?

This trips up almost everyone modelling it for the first time. The annual interest the borrower pays the lender isn't a neutral internal transfer — it has tax consequences on both sides. The interest is taxable income to the lender (you report it on your return) and, because the borrowed money was invested, it's generally deductible to the borrower as a carrying charge. So if you lend $500,000 at 3%, the $15,000 of interest your spouse pays you each year is $15,000 of income added to your already-high return — taxed at your marginal rate.

The payment itself has to be real money actually moving from borrower to lender by January 30 — commonly funded by the borrower selling a small slice of the investment or from the income it threw off. The strategy still wins because only the investment return above the interest gets shifted to the low-income spouse. Lend at 3% into an account returning 8%, and it's the spread — the 5% — that ends up taxed in the lower bracket. If the return ever dips below the prescribed rate, there's nothing to split that year, and you're paying tax on interest income for no gain.

Don't forget the spousal credit clawback

There's a cost that's easy to miss: as your lower-income spouse's net income rises (from the investment income now taxed in their hands), you can lose part or all of the spousal amount tax credit you'd been claiming for them. That clawback is a genuine offset against the strategy's savings, not a rounding error — for a spouse going from zero income to several thousand dollars of investment income, it can erase a meaningful chunk of the first-year benefit. The strategy can still come out well ahead over time, because the credit loss is roughly fixed while the invested capital compounds, but any honest projection has to net the lost spousal credit against the tax saved. Build it into the math from the start rather than discovering it at tax time.

How big should the loan be — and should you aim for a 50/50 split?

The instinct to size the loan so both spouses end up with roughly equal investment balances is reasonable, but the goal isn't symmetry for its own sake — it's getting as much investment income as possible taxed at the lower rate without pushing the low-income spouse up into brackets that erode the gap. The benefit grows with two things: the size of the loan and the spread between the two spouses' marginal rates. So you generally lend as much as you can usefully invest in the non-registered space, while watching that the income it generates doesn't lift the borrowing spouse's rate close to yours (at which point the splitting benefit shrinks) or trigger clawbacks of income-tested credits and benefits.

A few practical notes on sizing. First, only non-registered money benefits — anything that fits in a TFSA or RRSP is already sheltered, so fill those first and run the loan strategy on what's left over. Second, you don't have to commit a final number on day one: you can start with one loan and, later, add a second prescribed-rate loan for more capital. Just know each loan carries the prescribed rate in effect on its start date — a new loan made when the rate is higher locks in that higher rate, while your original loan keeps its lower one. Third, a useful checkpoint for "is the loan big enough to bother": the annual tax saved should comfortably exceed the lost spousal credit plus the admin effort of running it. If you're chasing a near-perfect 50/50 balance, that's an asset-location and estate question worth taking to a fee-only planner — the loan is the tool, not the goal.

One more point in this strategy's favour: prescribed-rate spousal loans are not caught by the tax-on-split-income (TOSI) rules, which is what makes this a sanctioned route to income splitting where most others are now closed off.

A spousal loan only exists, as far as the CRA is concerned, if there's a real loan to point to. That means a written agreement or promissory note recording the lender and borrower, the amount, the date, and the prescribed interest rate being charged. Without it, the money looks like a gift — and a gift is precisely what triggers attribution. The document isn't bureaucratic box-ticking; it's the thing that converts "I gave my spouse money" (attributed back to you) into "I lent my spouse money at the prescribed rate" (not attributed). Our guides on charging interest on a family loan and the CRA prescribed rate for family loans go deeper on getting the interest terms right.

The other "spousal loan": just lending your partner money

Not every loan between partners is a tax strategy. Far more often, one partner simply lends the other money for an ordinary reason — covering a debt, buying a car, funding one person's share of a property, or bridging a gap between jobs. There's no prescribed rate to worry about and no January 30 deadline; it's just a loan between two people who happen to be together.

It's still worth writing down, and for a reason that has nothing to do with the CRA: relationships sometimes end. If a couple separates, money that moved between them becomes one of the first things in dispute — was it a loan to be repaid, a gift, or a contribution to shared property? Common-law partners are especially exposed, because they don't get the same automatic property-sharing rules as married spouses in most provinces, so a documented loan can be the clearest evidence of what was actually intended. A short signed agreement that records the amount, the purpose, and the repayment terms protects both partners and keeps a hard moment from getting harder.

Should you use a spousal loan?

The tax-planning version tends to make sense when there's a genuine, lasting gap between two partners' tax brackets and a meaningful sum available to invest outside registered accounts. It's least useful when incomes are similar, when the money would sit in a TFSA or RRSP anyway (those already shelter the income), or when nobody will reliably handle the January 30 payment each year. Because the rules are strict and the downside of getting them wrong is losing the benefit entirely, this is one area where running it past an accountant first genuinely pays for itself. What you can do yourself, easily, is the part everything else rests on: a clear, signed loan agreement.

This article is general information for Canada, not tax or legal advice. Spousal-loan and attribution rules are set out in the Income Tax Act and administered by the CRA; the prescribed rate changes quarterly and the figures here reflect 2026. K.G. v. D.G., 2023 BCSC 1162 is summarized for general illustration; outcomes turn on each case's facts. For your own situation, consult a licensed accountant or tax advisor, and a lawyer for relationship-property questions.