How a 'Prescribed Rate Loan' Can Cut Your Family's Tax Bill in Half

🚫 The "Gift" Mistake

You earn $300,000 (subject to a ~54% marginal tax rate). Your spouse earns $0. You gift your spouse $500,000 to invest in stocks, assuming the dividends will be taxed at their lower rate. WRONG. Under the Canada Revenue Agency's (CRA) "Attribution Rules," any income generated from that gift is attributed back to YOU and taxed at your high rate. You achieved nothing but paperwork.

How a 'Prescribed Rate Loan' Can Cut Your Family's Tax Bill in Half

The CRA is vigilant about income splitting. However, there is a legitimate exception written directly into the Income Tax Act.

If you LEND the funds instead of gifting them, and charge a specific interest rate, the Attribution Rules do not apply. This strategy is known as a Prescribed Rate Loan.

How It Works (The Arbitrage)

The strategy relies on a simple gap: Investment Return > Loan Interest Rate.

📝 The Steps:

1. High Earner lends capital to Low Earner via a formal Promissory Note.
2. The note charges the CRA's current Prescribed Rate (locked in at the time of the loan).
3. Low Earner invests the funds and aims for a higher return (e.g., 7-9%).
4. Low Earner pays the interest back to High Earner annually.
5. The Result: The High Earner pays tax only on the small interest received. The Low Earner pays tax on the remaining investment profit at their lower bracket.

Real Tax Savings

Let's compare investing directly vs. using the loan strategy on a $500,000 portfolio earning 8% ($40,000 gain), assuming a 4% Prescribed Rate for 2026.

Scenario	Tax Calculation	Total Family Tax Bill
High Earner Invests (Status Quo)	$40,000 gain taxed at 54%	~$21,600
Spousal Loan Strategy	1. High Earner pays tax on interest received ($10,800) 2. Low Earner pays tax on remaining profit ($4,000)	~$14,800 (Save ~$6,800/yr)

By shifting the tax burden, this family saves nearly $7,000 per year. Over 10 years, with compound growth, this can preserve over $100,000 in family wealth.

Chief Editor’s Verdict

This strategy requires strict discipline. The Low Earner MUST pay the interest to the High Earner by January 30th of the following year. If you miss this deadline even once, the loan is retroactively disqualified, and Attribution Rules apply.

Always consult a CPA to draft the Promissory Note and lock in the rate. Once established, it remains the premier income-splitting tool available in Canada.

⚖️ Legal Disclaimer:
The information provided in this article is for educational purposes only and does not constitute financial, legal, or tax advice. The "Prescribed Rate" is set quarterly by the CRA based on 90-day T-bill yields and is subject to change. Strict adherence to the January 30th interest payment deadline is mandatory to maintain the tax benefits. Failure to pay interest on time will result in the permanent loss of the income-splitting benefit for that loan. Please consult with a Chartered Professional Accountant (CPA) to ensure proper execution.