Splitting Investment Income the Right Way in Owen Sound

The situation

Bohdan ran his own business out of Owen Sound, contracting his services as a factory technician to several manufacturers in the area who needed equipment serviced and repaired on short notice. After fifteen years of steady work, he had built up savings beyond what he needed for his business and his family. His spouse, Andriy, worked full-time as a factory technician on a plant floor, earning a modest and stable salary that put him in a noticeably lower income tax bracket than Bohdan.

The couple wanted to start investing a portion of Bohdan's savings — about $40,000 — in a modest, diversified portfolio. The obvious question was whose name the account should go in. If Bohdan simply invested the money himself, the investment income would be taxed at his higher marginal rate every year. If he just handed the $40,000 to Andriy to invest, the income from that account would still be taxed as though it were Bohdan's — a result neither of them expected.

Bohdan had heard from a coworker that there was a legitimate way to have a lower-income spouse hold and grow family investments without the income being attributed back to the higher earner. He came to Treadstone Law wanting to understand whether that was actually true, and if so, how to do it without making a mistake that would undo the benefit.

The tax problem

The Income Tax Act contains attribution rules that exist specifically to stop couples from doing what Bohdan and Andriy first considered: one spouse simply gifting or lending money to the other, interest-free, so that investment income lands in the lower-earning spouse's return. Under those rules, if a person transfers or lends property to their spouse without adequate consideration, any income or capital gains that property generates continues to be attributed back to the person who provided it — taxed on their return, at their rate, even though the account sits in their spouse's name.

This surprises a lot of people, because it feels like the opposite of what a well-advised couple would want. The rules are not a loophole to be worked around quietly; they are the default outcome unless a taxpayer structures the transfer in one of the specific ways Parliament left open. One of those ways — well established and used routinely by tax and estate planners — is a genuine loan between spouses, made at the CRA's prescribed interest rate in effect at the time the loan is set up, with interest actually paid each year.

The prescribed rate is published quarterly and, at the time Bohdan and Andriy set up their arrangement, was low — meaning Andriy would owe very little in interest relative to the investment income the $40,000 could reasonably be expected to earn. Once a loan is made at that rate and the paperwork and payments are handled correctly, the investment income earned on the loaned funds belongs to the borrowing spouse for tax purposes, not the lending spouse. The gap between the low interest cost and the investment return is, in effect, the income split the couple was hoping for.

The risk was not the concept — it was the execution. The CRA does not accept a casual understanding between spouses as a loan. Several conditions have to be met and maintained every single year, and a slip in any one of them can cause the CRA to treat the arrangement as though it were never a real loan at all, pulling every year of income back onto Bohdan's return retroactively, along with interest and possibly penalties on the reassessment.

What we did

1. Confirmed the couple's numbers actually supported the strategy. Before recommending anything, we reviewed Bohdan and Andriy's income levels to confirm the tax-bracket gap between them was large enough that the administrative effort of a prescribed-rate loan was worth it. For a $40,000 loan generating a modest annual return, the numbers worked — the spread between Andriy's lower rate and Bohdan's rate on the investment income, year after year, outweighed the cost of setting the structure up properly.
2. Drafted a genuine loan agreement. We prepared a written loan agreement between Bohdan and Andriy setting out the $40,000 principal, the interest rate fixed at the prescribed rate in effect when the loan was made, and clear repayment terms. A loan that exists only informally, or that is drafted after the fact to match a return already filed, does not hold up on review — the paperwork has to reflect a loan actually intended and understood at the time.
3. Explained that the rate is locked in, not floating. One detail people often get wrong is assuming the interest rate on a spousal loan changes as the CRA's prescribed rate moves each quarter. It does not — the rate that applied when the loan was made is locked in for the life of that loan. We made sure Bohdan and Andriy understood this so they would not mistakenly try to renegotiate the rate later, which could compromise the arrangement's validity.
4. Set up a discipline for the annual interest payment. The single most common way these arrangements fail is that the borrowing spouse forgets to actually pay the interest, or pays it late. The interest for a calendar year has to be paid by a firm date early the following year — there is no grace period the CRA will forgive. We set Bohdan and Andriy up with a simple annual reminder and a dedicated bank transfer from Andriy to Bohdan each January, and explained plainly that missing that one payment even once could unwind the entire structure for every year going forward, not just the year missed.
5. Walked through the tax reporting on both sides. We explained that Bohdan needs to report the interest income he receives from Andriy each year, and that Andriy needs to report the investment income the $40,000 generates, along with a deduction for the interest he pays to Bohdan since the loan funds investments intended to produce income. Getting the reporting consistent on both returns is part of what makes the arrangement withstand scrutiny if it is ever reviewed.
6. Documented everything for future reference. We provided the couple with a summary letter, the signed loan agreement, and a simple annual checklist they could hand to their accountant each tax season, so the arrangement would be maintained correctly for as long as they kept it in place — not just understood correctly in year one.

The outcome

Bohdan and Andriy's prescribed-rate loan was set up correctly from the start, and the strategy did exactly what they hoped. Each year, the investment income generated by the $40,000 — after Andriy paid Bohdan the modest annual interest required under the loan — was taxed on Andriy's return at his lower rate rather than being attributed back to Bohdan. Over time, that difference meaningfully reduced the family's overall tax bill on money that was, functionally, still a shared household asset.

The arrangement has now run for several tax years without incident. Andriy has made every interest payment on time, the couple's accountant reports both sides of the loan consistently each spring, and the loan agreement sits in their records in case it is ever asked for. Nothing about the structure has needed to change, because it was built correctly the first time rather than patched together after a mistake.

What made this a clean win was not a clever trick — it was following a well-established planning tool with exact discipline. The prescribed-rate loan strategy is publicly known and widely used; it fails for people not because the idea is wrong, but because the mechanics slip: a missed interest payment, an undocumented understanding, a rate that gets renegotiated informally. Bohdan and Andriy avoided every one of those pitfalls because the structure was documented, explained, and built around a reminder system from day one.

What you can learn from this