If you and your spouse have vastly different annual incomes then you'll want to pay close attention to this time sensitive tax tip!

Transcription: Today we're going to cover the topic of income splitting, but not all of income splitting because that is going to take hours. We're going to specifically cover a topic called: spousal investment loans.

Income splitting is an extremely useful tool when spouses’ have different levels of income. For instance, in Ontario someone at the highest tax bracket is paying taxes at somewhere around the 50 percent mark whereas someone with no income is paying no tax.

Perfect income splitting between Spouses can lead up to $17,000 per year in tax savings. That's a huge potential savings. Intuitively a spouse with a high income level is going to want to transfer money over to the spouse with a low income level so that particular spouse can make an investment and pay tax on the investment returns at their low level. Now if this is done incorrectly the attribution rules of the income tax act are going to kick in and deem that investment returns were earned at the higher income earning spouses' level and tax it in their hands.

So how do we get around this? We get around this by doing something called an investment loan. The high income earning spouse takes their money, loans it to the lower income earning spouse and charges interest at what is called the prescribed rate. The higher income earning spouse claims this interest as income and pays tax on it at their marginal rate then the lower income earning spouse will be able to claim the actual investment returns on their income tax return paying tax presumably at a lower rate.

This is a really good strategy especially at the moment because we're at a period where the prescribe rate is at a historically low level of 1% so even modest returns are going to provide the family with a tax benefit overall. Obviously it's not as simple as this, you are going to have to contact a tax lawyer or a tax accountant who's familiar with this strategy because there's a lot of potential pitfalls. You don't want to try to do this yourself it's not something that you can do yourself, trust me. Thanks for listening we'll see you next week