Prescribed Rate Loan: An Income Splitting Opportunity



Linson Chen

Financial Advisor & Portfolio Manager


Income splitting refers to transferring income from high income earners to lower income family members. Income splitting can be used to reduce the total taxes that you pay as a family when members are in different marginal tax brackets.

The Income Tax Act has measures in place to limit income splitting opportunities. If you were to gift or loan funds to your spouse without charging any interest, any investment income and capital gains earned from those funds would attribute back to you and taxed in your hands. However, attribution of income does not occur if interest is charged at a minimum of the prescribed rate when the loan was put in place.

How would this work?

This is accomplished by having the higher income earning spouse lend funds to the lower income earning spouse at the prescribed interest rate.

The borrower would take the funds and invest the money to earn income and/or capital gains.

The loan should be properly documented with a loan agreement, often in the form of a promissory note. Interest on the loan must be paid annually before January 30. If the interest payment is missed, the attribution rules will apply, and the benefits of this strategy will be lost for future years.

The income from the investment, less the amount of interest paid by the borrower is taxed at the lower income earning spouse’s tax rate.

This strategy would be best utilized for individuals with significant differences in tax brackets and have substantial funds available to lend and invest inside a non-registered investment account.

The prescribed interest rate is set at 1% until June 30, 2022. The prescribed interest rate will increase to 2% on July 1, 2022. Those considering this type of tax planning may wish to do so prior to the rate increase and lock in a historically low 1% prescribed interest rate for the life of the loan.

Understanding the investment risk, expected investment performance and tax implication of a prescribed rate loan can be complex. Please speak to your RGF advisor to learn if this would be a suitable strategy for your situation.

You might also be interested in...

Business Owners

The most overlooked area of financial planning for business owners and incorporated professionals is the lack of integration between corporate and personal assets. When the majority of your assets are in your corporation you need very specific, specialized and personalized financial advice.

Learn More
Business Owners

Search Insights
Book a meeting
Schedule a meeting with an RGF Advisor.