The Canada Revenue Agency is raising its “prescribed interest rates” for the first time since the fall of 2003. The rate used to calculate low-interest spousal loans will rise to 4% from 3% in the next quarter, starting on April 1.

Spousal loans –- a common income-splitting technique –- can provide significant tax savings. While arranging a loan before April 1 won’t help your clients with their 2005 taxes, it will still help them going forward in saving taxes on their investments.

Here’s how it works. One spouse falls within the highest tax bracket. The other spouse has a lower tax rate. They enter into a written agreement, drafted by a lawyer, to enable the loan from the high-income spouse to the lower-income spouse. The low-income spouse invests the loaned money.

The prescribed rate of interest must be charged, otherwise income earned on the invested money will be attributed back to the high-income spouse. As long as the return on the investment is higher than the prescribed rate the couple will come out ahead. The income is also taxed at the low-income spouse’s tax rate.

Under the terms of the agreement, that spouse must pay the prescribed interest on the loan by Jan. 30 of each year for the prior year’s interest charge. The loaned funds should be kept separate, and interest payments should be easy to track.

Setting up a loan agreement isn’t difficult, but this is a strategy that advisors should only suggest to their high net-worth clients. The loan should be substantial enough to make the process worthwhile.