A prescribed rate loan is a loan from a higher-income spouse or family member to a lower-income one at the CRA’s published interest rate, a legitimate income splitting strategy that avoids the attribution rules when structured correctly.

Normally, income earned on assets transferred to a lower-income spouse is attributed back to the transferor and taxed in that party’s hands, eliminating the income splitting benefit. A prescribed rate loan is the exception. When a loan is made at the CRA’s prescribed rate, set quarterly, and the interest is paid by January 30 of the following year, attribution does not apply. The investment income earned by the lower-income spouse is taxed at that individual’s rate.

The planning value compounds over time: once established, the loan rate is locked in for the life of the loan, even if the prescribed rate rises later. Loans set up during low-rate periods can continue generating income splitting benefits for years. The mechanics must be precise, a written loan agreement, actual interest payments, and proper reporting, because the CRA scrutinizes these arrangements closely.

Income splitting through a prescribed rate loan requires exact structuring to work as intended. See how Wefinx approaches tax planning.

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