11/03/2025
How Income Splitting with a Loan Can Save You Taxes — Explained!
When one spouse earns significantly more than the other, they often pay a higher marginal tax rate. Instead of keeping all the investments (and their taxable income) in the higher earner’s name, income splitting allows families to legally shift investment income to a spouse or family member in a lower tax bracket — reducing the overall household tax bill.
Here’s how it works:
1️⃣ The higher-income spouse lends money to the lower-income spouse at the CRA’s prescribed rate (currently 5% as of 2025).
2️⃣ The lower-income spouse invests the borrowed funds in income-generating assets — such as stocks, mutual funds, or ETFs.
3️⃣ Any investment growth or income earned is taxed at the lower-income spouse’s rate, which can mean significant savings.
4️⃣ The lower-income spouse pays the 5% interest back to the higher-income spouse each year, keeping the strategy compliant with CRA rules.
📊 Example:
Let’s say Sarah earns $250,000 per year, and her husband Michael earns $40,000. Sarah lends Michael $200,000 at the CRA’s 5% prescribed rate. Michael invests it and earns 8% ($16,000).
• He pays Sarah 5% interest ($10,000), which she reports as taxable income.
• The remaining $6,000 of investment income is taxed in Michael’s lower bracket — saving the couple potentially $1,500–$2,000 in taxes annually, depending on their province and rates.
Over time, the savings compound — especially as investments grow and rates change.
🏦 Bottom line:
Income splitting through a loan isn’t just for the wealthy — it’s a smart, strategic way to keep more of your hard-earned money in the family.
📞 Contact Legacy Wealth Advisory to explore how this strategy could fit into your family’s financial plan.
🌐 legacywealthadvisory.ca
📱 (416) 471-3766 | 📞 (905) 840-2222
