I saved a client over $23,000 a year employing this strategy, a YEAR, in taxes!!!!!
OK, so....this is how it works. You have to be married. Your spouse has to be unemployed or have a big variance in income to employ this strategy. It's a form of income splitting that is a way to avoid paying taxes that is completely legal.
Canada Revenue Agency (CRA) rules that a higher income earning wife, for example, cannot gift her husband a large sum of money to invest to take advantage of his lower marginal tax rate. Any investments made on his behalf must come from his earned income, otherwise the income (in the form of interest, dividends and capital gains) is attributable back to the wife. If, however, the lower income spouse does the savings and the higher income spouse pays the bills then it's OK to attribute any income from investments to the lower income earner PROVIDING that he does not invest, annually, more than her makes net of taxes.
If, however, you have a spouse who has no income then you can lend that spouse money at CRA's prescribed rate (currently 1%) and then that spouse can invest and any growth attributed from the investments are taxed at their lower marginal tax rate. Because the spouse is borrowing to invest and is earning income from the investment then the spouse can also write off the cost of borrowing (ie: the interest charges) on their income tax return. The lending spouse, however, must claim the interest as income but at the low rate of 1% the cost is more than offset by the spouses lower marginal tax rate.
