Prescribed Rate Loan Strategy in Canada 2025

Updated March 2025 · 10 min read

The prescribed rate loan is one of the few legitimate income-splitting strategies that survived Canada's attribution rules largely intact. It allows a higher-income spouse or family member to lend money to a lower-income spouse (or a family trust) at the CRA prescribed interest rate. The lower-income recipient invests the loan proceeds and reports the investment income — taxed at their lower marginal rate. The higher-income lender reports only the interest received, which is often deductible to the borrower.

What Is the Prescribed Rate?

The CRA prescribed rate is set quarterly based on Treasury bill yields. It is the minimum interest rate that must be charged on intra-family loans to avoid the spousal attribution rules under the Income Tax Act. The rate rose significantly from its historic 1% low (which it held from 2020–2022) to higher levels as interest rates increased:

• Q1 2020 – Q2 2022: 1% (historically low)
• Rate increased through 2022–2023 as Bank of Canada raised rates
• 2024–2025: CRA prescribed rate has been set at 4%–5% range (check CRA quarterly for current rate)

How the Strategy Works

Step 1: The Higher-Income Spouse Makes the Loan

The higher-income spouse lends a lump sum — say $500,000 — to the lower-income spouse at the current prescribed rate (currently around 4–5%). The loan must be documented in writing with a proper promissory note specifying the interest rate and repayment terms.

Step 2: The Lower-Income Spouse Invests

The lower-income spouse invests the borrowed funds in a non-registered investment account. The investments earn returns — dividends, interest, capital gains — taxable in the lower-income spouse's hands.

Step 3: Annual Interest Payment

The borrowing spouse must pay the lender the prescribed rate interest on the outstanding loan balance by January 30 each year. This interest payment must actually be made — it cannot simply be accrued. Missing the payment causes the attribution rules to apply retroactively from the beginning of the year.

Step 4: Reporting

The lender (higher-income spouse) reports the interest received as income — typically a small amount relative to the investment returns. The borrower reports the investment income (dividends, interest, capital gains) in their own hands and deducts the interest paid on the loan as an investment expense.

The Tax Benefit

The benefit comes from the difference between the prescribed rate interest and the investment returns earned on the loaned funds. If the lower-income spouse earns 7% on the loaned $500,000 and pays 4% to the higher-income spouse:

• Investment income retained by lower-income spouse: ~3% × $500,000 = $15,000/year (taxed at their lower rate)
• Interest income to higher-income spouse: 4% × $500,000 = $20,000/year (taxed at their higher rate, but often deductible to the borrower)
• Tax saving: the $15,000+ in net income retained by the lower-income spouse is taxed at, say, 30% vs. 53.5% — saving over $3,500/year in tax

Over 10–20 years, with compounding investment returns in the lower-income spouse's account, the cumulative tax savings can be substantial — often six figures for families with significant capital.

The Prescribed Rate Loan to a Family Trust

The prescribed rate loan strategy also works with family trusts. The higher-income individual lends to a family trust at the prescribed rate. The trust invests the funds and distributes income to lower-income beneficiaries (adult children, lower-income spouse). Subject to TOSI rules, income can be allocated to family members in lower tax brackets.

Critical Compliance Requirements

The prescribed rate loan strategy only avoids attribution if these conditions are met strictly:

• The loan must be documented in a written promissory note at the prescribed rate
• Interest must be paid annually, no later than January 30 of the following year
• Payment must be actual cash — an accounting entry is not sufficient
• If a payment is missed even once, attribution applies for the entire year (and potentially going forward)
• The loan must be at arm's length terms (though related parties can transact at the prescribed rate)

Current Rates and the Window for Low-Rate Loans

Families that established prescribed rate loans during the 2020–2022 period when the prescribed rate was 1% locked in that rate permanently (subject to continuing to make annual interest payments). The 1% rate is extraordinarily advantageous — essentially free capital for income-splitting purposes.

For families who did not establish loans during that period, the current prescribed rate (4%–5%) still allows meaningful income splitting when investment returns exceed the loan rate, but the benefit is narrower than it was at 1%. The strategy is still worth analyzing for families with significant investable capital.

Prescribed Rate Loan vs. Spousal RRSP

The prescribed rate loan is complementary to a spousal RRSP, not a substitute. A spousal RRSP uses RRSP contribution room to shift future retirement income to the lower-income spouse. A prescribed rate loan works outside of registered accounts and can be used to shift investment income immediately, in any year. They target different aspects of the household tax picture and both may be appropriate simultaneously.