by Arnold Machel CFP

“Let the husband render unto the wife due benevolence: and likewise also the wife unto the husband.”

  • 1 Cor 7:3 (KJV)


The three D’s of Tax Smart Investing are Deduct, Divide and Defer. Generally, Tax Deductions are best as they usually offer the highest tax savings. Dividing can offer substantial tax savings if you are able to shift income from a high bracket taxpayer to a low bracket taxpayer. And deferring can provide substantial tax savings but is best when the deferral is decades rather than years.



The focus of this article will be on a niche Divide tactic that can be very beneficial in some circumstances and has been made much more effective in the past month.

Dividing can be more complicated than one would initially think, at least in some circumstances. Technically speaking, while there is no restriction on giving money to our spouse, the Canada Revenue Agency (CRA) has something called ‘attribution rules’ to discourage gifting to a spouse just for the sake of saving tax. In short, if a spouse earns $5,000 of income in interest, but that interest is earned from money given to him by his wife, then the $5,000 will be attributed back to her as income. So, if it was done because she was a high-income earner and he was not, then the tax benefit is negligible.

For most of us, though, dividing income is relatively easy. If the dollar amounts aren’t large, the highest income earner can pay all the bills while the lower income earner can make all the savings. Furthermore, even if the dollars are larger, there is no attribution on contributions to a spousal RRSP, nor is there on money gifted to a spouse and subsequently contributed to a TFSA.  In short, for most of us it’s not too difficult to split things in such a way as to divide our income from assets.

But what about cases where one spouse inherits a substantial sum or has a significant business windfall? In those circumstances, we currently have an opportunity to take advantage of a little-known tax rule that has the effect of shifting earnings to the lower income earning spouse. Effective July 1 this year, CRA reduced its prescribed interest rate on loans to family down to 1 percent.


Here’s how it works.

Suppose Fred is a corporate executive earning $350,000 per year, Wilma is a stay-at-home mom with no outside earnings and Fred’s parents have passed away in the past year, so he inherits $1 million. To keep the math simple, let’s assume that both Fred and Wilma have already exhausted their RRSP, RESP and TFSA room and any other possible alternative strategies, so we are only dealing with a spousal lending strategy.

Fred could lend Wilma the $1 million and charge her only the 1% interest prescribed by CRA. Placing the money into a conservative investment, let’s assume she averages 3% per year. We could make things significantly better by targeting dividends and capital gains, but again in order to keep the math simple, for this situation, we’ll assume that’s all interest income.

So now instead of Fred paying taxes at a 49.7% rate (the highest here in BC) on the 3% of interest on the $1 million, he would pay tax on only the 1% he earns from Wilma. Wilma would have to pay tax on the difference (she’s earning 3% but has to pay out 1% to Fred, so she’d pay on the 2% net earnings), but she isn’t earning other income so her tax would be next to nothing, compared to the (almost 50%) tax Fred would have had to pay.

Let’s lay out the actual dollars as it relates to the $1 million loaned to Wilma.

  Wilma Fred
Earnings $30,000 $10,000
Cost $10,000 0
Net Interest Earned $20,000 $10,000
Tax Cost on Interest Earned $1,196 $4,970


Had Fred done nothing, he would have been the one to earn all the money. The extra tax he paid would have been $14,910 and Wilma would pay nothing. Instead, now between the two of them, they pay only a total of $6,156. They save $8,754 in taxes, and for not much additional complication.

One does need to dot their I’s and cross their T’s when adopting a strategy like this, but it isn’t difficult. It isn’t overly burdensome from a paperwork or tracking perspective, it’s exceedingly beneficial and it is black and white legitimate. My favourite kind of strategy.

If you are in a situation where you are inheriting money, or you think that you’re in the kind of situation where you could pay less tax by restructuring your investments then talk to your financial adviser and walk them through your situation. Good things may come of it.


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Arnold Machel (CFP)
Author: Arnold Machel (CFP)

Arnold Machel, CFP® lives, works and worships in the White Rock/South Surrey area where he attends Gracepoint Community Church.  He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services.  Questions and comments can be directed to him at or through his website at  Please note that all comments are of a general nature and should not be relied upon as individual advice.  The views and opinions expressed in this commentary are those of Arnold Machel and may not necessarily reflect those of IPC Investment Corporation.   While every attempt is made to ensure accuracy, facts and figures are not guaranteed.