What Is It?
Canada’s attribution rules (Income Tax Act, ss. 74.1–74.3) normally prevent high-income spouses from simply giving money to a lower-income spouse to invest — any resulting income gets attributed back to the transferor. However, a prescribed rate loan is a legal exception: if a higher-income spouse lends money to a lower-income spouse at or above the CRA’s prescribed interest rate, the attribution rules do not apply and the investment returns are taxed in the lower-income spouse’s hands.
The strategy is most powerful when:
- The spread between spouses’ marginal tax rates is large
- The prescribed rate is low (historically as low as 1%, though it fluctuates)
- The investments earn returns significantly above the prescribed rate
How It Works
Step 1 — Establish the loan. The higher-income spouse (lender) loans a sum to the lower-income spouse (borrower) under a formal written promissory note at the CRA’s current prescribed rate.
Step 2 — The borrower invests. The borrowing spouse invests the loan proceeds and earns returns (dividends, interest, capital gains).
Step 3 — Interest is paid annually. The borrowing spouse pays the prescribed rate interest to the lending spouse by January 30 of the following year. This is critical — missing even one payment permanently breaks the structure and the attribution rules re-apply for that year and all future years.
Step 4 — Tax result. The investment income is taxed in the borrower’s hands (at their lower rate). The lending spouse includes the interest received in their income, but that amount equals only the prescribed rate — the excess return stays in the lower-income spouse’s hands.
Do I Qualify?
- You are a Canadian resident with a spouse or common-law partner (or adult family member) in a lower tax bracket
- You have investable capital available to loan
- The prescribed rate for the quarter in which the loan is made is known and documented
- You can structure a formal promissory note with the prescribed interest rate
- The borrowing spouse can realistically pay the annual interest before January 30 each year
- The expected investment return exceeds the prescribed rate (otherwise there’s no tax benefit)
Current Prescribed Rate
The CRA sets the prescribed rate quarterly based on 90-day T-bill rates. Check the CRA website for the current prescribed rate before establishing the loan — the rate at the time of the loan is locked in for the life of the loan, regardless of future rate changes.
The locked-in rate is the key advantage: A loan established when prescribed rates were at 1% benefits permanently from that low rate even if rates rise later.
Annual Interest Payment Requirement
The interest must be paid by January 30 of the following calendar year. “Paid” means actually transferred — not just accrued. Options include:
- Direct bank transfer from borrower’s account to lender’s account
- Cheque
- The lender then reinvests or spends the interest as they choose
Missing a payment permanently breaks the loan structure. The attribution rules will re-apply for that year and every year afterward, regardless of future interest payments.
What Most People Don’t Know
- The loan can be for any family member, not just a spouse. Adult children in low-income years (students, etc.) can also be borrowers — though the attribution rules for minors are stricter and more complex.
- The lender must report the interest as income. The interest paid by the borrower is taxable to the lender. But at a low prescribed rate, this is a modest tax cost versus the savings on investment returns.
- Locking in a low prescribed rate is permanent. If you established a prescribed rate loan in a quarter when the rate was low, that rate is fixed for the life of the loan — future rate increases don’t affect it. This creates an opportunity to lock in low rates when they are available.
- The strategy compounds over time. The tax savings grow as the borrower’s investment portfolio grows and earns returns at their lower marginal rate.
Frequently Asked Questions
What happens if my spouse earns investment income below the prescribed rate in some years?
You still need to pay the prescribed rate interest on the loan. If the investment return is negative or below the prescribed rate, the strategy costs money in that year but does not disqualify the structure going forward. The long-term average return is what matters economically.
Can the borrowing spouse use the loan proceeds for anything, or must it be invested?
The loan proceeds must be used to earn income — investing in stocks, bonds, a rental property, or a business. Using loan proceeds for personal consumption doesn’t satisfy the income-earning requirement and may cause the attribution rules to apply.
Is there a minimum or maximum loan amount?
No statutory minimum or maximum. In practice, the strategy is most beneficial for larger portfolios (typically $100,000+) where the annual tax savings exceed the administrative costs of maintaining the structure (promissory note, annual interest payments, separate accounting).
My spouse doesn’t have investment accounts set up yet. Is that a problem?
No — the borrowing spouse opens their own investment account using the loan proceeds. The investments must be in the borrower’s name to be taxed in their hands. The CRA will look through arrangements where the lender controls the investments.