What Is a Prescribed Rate Loan in Canada?
A prescribed rate loan (also called a “spousal loan” or “family loan for income splitting”) is one of the most powerful — and underused — income splitting strategies available to high-income Canadian families. It allows a high-income spouse to loan money to a lower-income spouse (or family trust) at the CRA’s official prescribed interest rate, so that investment income earned on the loaned funds is taxed at the lower-income family member’s rate rather than the lender’s top marginal rate.
Unlike many tax strategies, the prescribed rate loan is completely CRA-sanctioned and explicitly permitted in the Income Tax Act (Section 74.5(2)). It is not an aggressive tax shelter — it is a planning technique the CRA itself recognizes as legitimate income splitting when done correctly.
Pathak Professional Corporation in Mississauga implements prescribed rate loan structures for high-income Ontario families as part of comprehensive tax planning. Call 437-872-7399 to assess whether this strategy fits your situation.
How a Prescribed Rate Loan Works: Step by Step
- High-income spouse (lender) loans funds to lower-income spouse (borrower) — the loan is documented in a formal written loan agreement setting the interest rate at the CRA prescribed rate in effect at the time the loan is made
- The interest rate is locked in for the life of the loan — this is a critical feature: even if the CRA prescribed rate rises in future quarters, the original rate applies for the entire loan
- The borrowing spouse invests the funds and earns income (interest, dividends, or capital gains) on the invested amount
- The borrowing spouse pays interest to the lending spouse by January 30 of the year following each year interest accrues (e.g., 2024 interest must be paid by January 30, 2025)
- Tax treatment:
- The lending spouse reports the interest received as income (taxed at top rate — but this is a small amount relative to the investment income shifted)
- The borrowing spouse deducts the interest paid and reports all investment income earned on the loaned funds at their lower marginal rate
- Net result: the investment income is taxed at the family’s lower rate rather than the lender’s top rate
Tax Savings Example: Prescribed Rate Loan for a High-Income Ontario Couple
Scenario: Dr. Patel earns $350,000/year (Ontario top marginal rate 53.53%). Their spouse, Priya, has minimal income. Dr. Patel has $500,000 in investment savings.
| Without Prescribed Rate Loan | With Prescribed Rate Loan (loan to Priya at 3%) | |
|---|---|---|
| Investment portfolio | $500,000 in Dr. Patel’s name | $500,000 loaned to Priya at 3% |
| Investment return (6%) | $30,000/year earned by Dr. Patel | $30,000/year earned by Priya |
| Interest paid to Dr. Patel (3%) | N/A | $15,000 paid to Dr. Patel; Priya deducts $15,000 |
| Dr. Patel’s tax on income | $30,000 × 53.53% = $16,059 | $15,000 × 53.53% = $8,030 (interest income) |
| Priya’s tax on net income | $0 | ($30,000 − $15,000) × ~20% = $3,000 |
| Total family tax | $16,059/year | $11,030/year |
| Annual tax saving | — | $5,029/year |
| 10-year cumulative saving | — | $50,290+ |
The January 30 Interest Payment Deadline: The Most Critical Rule
The most common reason prescribed rate loan arrangements fail — and trigger the CRA’s attribution rules — is missing the January 30 interest payment deadline.
The rule: The borrowing spouse must pay the interest on the loan to the lending spouse by January 30 of the following calendar year. If a single year’s interest is not paid by January 30:
- The attribution rules in Section 74.1(1) apply to the entire loan for the current year AND all future years
- All investment income earned on the loaned funds is attributed back to the lending spouse as if the loan never existed
- The structure is permanently broken — even if you start paying interest again, the CRA does not allow the attribution to be “turned off” again for that loan
Practical steps to prevent missing the deadline:
- Set a calendar reminder for January 15 each year to calculate and prepare the interest payment
- Have the interest payment wired or transferred by January 25 (gives you 5 days of buffer)
- Maintain clear documentation: the lending spouse reports the interest on Line 12100 of their T1; the borrowing spouse deducts it on Line 22100
Locking In the Prescribed Rate: Why Timing Matters
The CRA prescribed interest rate has changed significantly in recent years:
| Quarter | CRA Prescribed Rate |
|---|---|
| Q1 2022 (Jan–Mar) | 1% (historic low) |
| Q3 2022 (Jul–Sep) | 3% |
| Q2 2023 onward | 5–6% |
| Check CRA website for current rate | Updated quarterly |
Key planning implication: Loans established during low-rate quarters lock in that rate permanently. Families who established prescribed rate loans in Q1 2022 at 1% locked in a highly favorable rate for the entire life of the loan — even as the prescribed rate rose to 5%+ in subsequent years. The strategy remains mathematically attractive at any prescribed rate below the family’s blended marginal rate differential.
Prescribed Rate Loan vs. Other Income Splitting Methods
| Method | How It Works | TOSI Risk? | Best For |
|---|---|---|---|
| Prescribed rate loan | Loan at prescribed rate; investment income taxed to lower-income borrower | ❌ No — explicitly exempted | Investment income splitting for married/common-law couples |
| Spousal RRSP | Contribute to spouse’s RRSP; they own it at retirement | ❌ No — pension splitting available anyway at 65 | Retirement income equalization |
| Corporate dividend to shareholder-spouse | Spouse is shareholder; dividends paid to them | ⚠️ Yes — TOSI applies if spouse not active in business | Business income (only if spouse is active) |
| Family trust with prescribed rate loan | Loan to trust; trust allocates income to multiple family members | ⚠️ Yes — TOSI applies for adult beneficiaries not in business | Multiple beneficiaries (minor children use differently) |
Frequently Asked Questions: Prescribed Rate Loan Canada
What is the CRA prescribed interest rate in 2025?
The CRA’s prescribed interest rate is updated quarterly and published on the CRA website. It reached a low of 1% during certain quarters in 2022 and rose significantly through 2023. For the current prescribed rate, visit the CRA’s “Prescribed interest rates” page at canada.ca. For prescribed rate loan purposes, the relevant rate is the one in effect for the quarter in which the loan is first made — and that rate is locked in for the life of the loan regardless of future rate changes.
Who can benefit from a prescribed rate loan in Canada?
The prescribed rate loan strategy is most beneficial for families where there is a significant income gap between spouses or common-law partners. At a minimum, one partner should be in the top two Ontario tax brackets (income over approximately $106,717) while the other has significantly lower income. The higher the income differential and the larger the investment portfolio being loaned, the greater the annual tax savings. It is particularly effective for high-income professionals (doctors, lawyers, engineers), business owners, and anyone with substantial non-registered investment assets.
What documentation is needed for a prescribed rate loan?
A prescribed rate loan must be documented with a formal written loan agreement (also called a promissory note) that specifies: the principal amount loaned, the interest rate (exactly equal to the CRA prescribed rate in effect at the time of the loan), the repayment terms, and the date the loan was made. The agreement should be signed and dated by both parties. Additional documentation requirements include: evidence of the actual transfer of funds (bank statement), record of annual interest payments by January 30, and T1 reporting (lender on Line 12100; borrower deducts on Line 22100). Have a Mississauga CPA prepare the loan documentation to ensure it meets all CRA requirements.
Does the prescribed rate loan strategy work for investment income from a corporation?
The prescribed rate loan applies specifically to investment income earned in personal (non-registered) accounts by the lower-income spouse using loaned funds. For corporate income, the relevant rules are different — corporate dividends paid to shareholder-spouses may be subject to TOSI. However, a prescribed rate loan can be made to a family trust, which then invests or holds interests in a corporation — the attribution rules are avoided (subject to careful TOSI analysis), and income can be allocated to lower-income adult beneficiaries who meet the “excluded amount” tests. This is a more advanced structure that requires careful planning with a CPA and tax lawyer.
