Prescribed Rate Loans: A Structured Approach to Income Splitting

Prescribed rate loans are a long-standing, CRA-approved planning strategy that allows families to shift investment income from a higher-income spouse to a lower-income spouse, potentially reducing overall household tax payable.

According to Canaccord Genuity’s January 2026 Wealth Blueprint, the strategy works by having the higher-income spouse lend funds to the lower-income spouse at the CRA’s prescribed interest rate. The borrowing spouse invests the funds in a non-registered account and pays interest annually at the prescribed rate. The lending spouse reports the interest as income, while any investment returns above the prescribed rate are taxed in the borrower’s hands at their lower marginal rate.

The prescribed rate is set quarterly by the CRA based on Government of Canada three-month Treasury Bill yields and rounded up to the nearest whole percentage. As of January 2026, the prescribed rate is 3 percent. Once a loan is established, that rate is locked in for the life of the loan, regardless of future changes in interest rates.

Canada’s attribution rules generally prevent straightforward income splitting between spouses. If funds are gifted or loaned interest-free, any resulting investment income is attributed back to the higher-income spouse. However, subsection 74.5(2) of the Income Tax Act provides a specific exception when a loan is made at the prescribed rate and interest is paid annually on time.

The strategy’s effectiveness depends on several factors, including the size of non-registered assets, the tax rate differential between spouses, and whether investment returns exceed the prescribed rate. The report highlights that the strategy becomes more relevant once registered accounts are maximized and at least $250,000 to $500,000 of non-registered capital is available.

Compliance is critical. Interest must be paid in cash by January 30 of the following year. Missing this deadline permanently invalidates the loan for tax purposes. Proper documentation, clear tracing of funds, and strict adherence to CRA requirements are essential.

Prescribed rate loans are not suitable for every household, but when implemented correctly, they can form part of a broader tax and wealth planning framework.

Want to learn more? Watch the full video for a clear walkthrough of how prescribed rate loans work and the key considerations involved or contact us to discuss how these developments could affect your portfolio, please contact us at 604.643.0101 or cashgroup@cgf.com.

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