Market Update & Income Splitting Technique

I hope you had a great long weekend! The past couple of months have been a rollercoaster for the markets, but overall, there's been more good news than bad news for investors. Despite the recent drawdown due to tariff headlines, markets have almost fully retraced losses for the first half of 2025. In the middle of March I noted that markets had started to decline, referencing the chart below.




At that point the Nasdaq (technology focused US index) had dropped -9.38% for the year, which turned out to only be a brief rallying point before dropping further. (See below)



You'll notice from the chart above that the Nasdaq ended up hitting a low of -20.94% on the year in late April, only to start rebounding through to today where it sits down only -1.24%. The Dow Jones Industrial Average and the S&P500 index also saw steep declines around this timeframe, but have also reclaimed their drawdowns and are currently sitting with positive performance year to date of 0.03% and 0.71%, respectively.

I'd say the major lesson to take out of this period is that an overreaction can cause serious damage to long term wealth. If you had made the decision to sell out and wait for "better times" you would have missed out on a sharp and quick correction of the markets, similar to what we saw during the COVID-19 timeframe as well. The lesson remains, stay focused on your long term goals, and the short term becomes noise.

Financial Planning Strategy Now Available

Since Canada has been lowering interest rates steadily this year, that means interest rates on short term cash have been decreasing, however it also means the interest rate that the CRA uses for prescribed loans is also being reduced. This rate is being reduced down to 3% starting July 1st 2025. 

So what is a prescribed loan?

A prescribed loan is when investment funds are loaned from a high income family member to a low income family member using a formal loan agreement. The potentially benefit of this scenario is to shift investment income from a higher income spouse to a lower income spouse. To see how this can work in action, let's consider the following scenario.

 

• Alex: High-income earner ($300,000/year).
• Blake: Lower-income earner ($50,000/year).
• Available Cash to Invest: $500,000
• Investment Return Assumption: 10% annually (interest income)
• Spousal Loan Interest Rate (CRA Prescribed): 3%

❌ Without a Spousal Loan

• Alex invests $500,000 directly:
  • Annual Investment Income: $500,000 × 10% = $50,000
  • Tax Payable (53.53% marginal rate): $50,000 × 53.53% ≈ $26,765
  • After-Tax Income: $50,000 - $26,765 = $23,235

✅ With a Spousal Loan at 3%

1. Alex loans $500,000 to Blake at 3%.
2. Formal loan agreement is signed and interest is paid annually.
3. Blake invests and earns 10% annually.

Blake’s Tax Calculation:

• Gross Investment Income: $500,000 × 10% = $50,000
• Interest Paid to Alex: $500,000 × 3% = $15,000
• Net Taxable Income for Blake: $50,000 - $15,000 = $35,000
• Tax Payable (20.05% marginal rate): $35,000 × 20.05% ≈ $7,018
• After-Tax Income for Blake: $35,000 - $7,018 = $27,982

Alex’s Tax Calculation:

• Interest Income Received: $15,000
• Tax Payable (53.53%): $15,000 × 53.53% ≈ $8,030
• After-Tax Income for Alex: $15,000 - $8,030 = $6,970

💰 Combined After-Tax Income (With Spousal Loan)

• Blake: $27,982
• Alex: $6,970
• Total: $34,952

When you combine the after-tax income of both spouses using the spousal loan ($27,982 from Blake and $6,970 from Alex), the household ends up with $34,952 in after-tax income—$11,717 more than they would have had without using the spousal loan. This just goes to show that while interest rates for short term cash is going down, it does present opportunities in other areas to save on tax.

If you want to know if this strategy might apply to you, please reach out!

Best,
Jon


Jonathan Adomait
Financial Planner | CFP, CIM, B.Eng