Prescribed rate loans: an income splitting opportunity

By ATB Wealth 25 July 2022 6 min read

Income splitting refers to transferring income from a higher income-earning family member to a lower income-earning family member, such as a spouse. Income splitting can reduce the total taxes you pay as a couple where spouses are in different tax brackets.


What is a prescribed rate loan?

A prescribed rate loan is one such income splitting strategy and is often referred to as a spousal loan, since the strategy is commonly used between spouses. This is accomplished by the higher income-earning spouse lending funds to the lower income-earning spouse at the “prescribed interest rate”. You might wish to consider a spousal loan if:

  • You and your spouse are in different tax brackets; and
  • You have significant funds available to invest in a personal non-registered investment account.

The Canada Revenue Agency (CRA) maintains a list of interest rates for the purpose of these loans, among other purposes, which is updated quarterly. The loan should be properly documented with a loan agreement. The borrowed funds can then be invested by the borrower spouse. The income from these investments, less the amount of interest paid by the borrower to the lender spouse, is taxed at the lower income-earning spouse’s tax rate. Interest on the loan must be paid annually before January 30. It’s important to note that in most cases, if the interest payment is missed or late even a single time, the strategy can be permanently tainted.

The tax benefits from this strategy can be substantial, in some cases. The highest tax rate in Alberta in 2022 is 48%, compared to only 25% for spouses in the lowest tax bracket. This strategy usually requires a relatively large investment portfolio, however.

It is also important to consider the investment risks of this strategy, and your investment philosophy should be at the forefront of your thinking. Spousal loan funds are typically invested for a long-term horizon in publicly-listed securities or mutual funds, such as the CompassTM Portfolios and ATBIS Pool Funds. In contrast, if you are invested in a high-interest savings account (HISA), the interest earned on the HISA may be less than the prescribed rate. In this case, the spousal loan strategy may not be beneficial unless rates increase significantly in the future.


Why consider a spousal loan now?

The interest rate for a spousal loan, for the entire period the loan is outstanding, is based on the prescribed rate in effect at the time the loan is entered into. The prescribed interest rate was 1% from July 1, 2020 through June 30, 2022. The prescribed interest rate increased to 2% on July 1, 2022 and will increase to 3% on October 1, 2022. Those considering this type of planning may wish to do so prior to the upcoming rate increase as the lower borrowing cost may provide the opportunity for greater income splitting.

Consider an example where a couple resident in Alberta expect to earn $320,000 and $110,000, respectively, excluding investment income. The higher income-earning spouse has $500,000 to invest, which would earn interest at 5%. If the higher income-earning spouse makes this investment, they would earn $25,000 of investment income and owe $12,000 of tax.

On the other hand, if the couple uses a spousal loan strategy, the same $25,000 of investment income would result in only $10,200 of tax (with a prescribed rate loan of 2%). Assuming the tax rates do not change, this could result in $1,800 of tax savings per year, based on Alberta’s 2022 tax rates. Note that this example uses interest income for illustrative purposes. In practice, spousal loan funds are typically invested in a manner that can also produce dividend income, foreign income, and capital gains.


What if I already have a spousal loan in place at a rate higher than 2 per cent?

You cannot simply revise the rate on an existing loan to 2%. Instead, the borrower would have to repay the loan, generally by selling the purchased investments. A new loan could then be put in place at the lower 2% rate and the funds reinvested.

The sale of the investments will generally result in capital gains or losses. In the case of a capital gain, the cost of the resulting taxes must be weighed against the benefit of the lower interest rate going forward. Conversely, where a capital loss is anticipated, the superficial loss rules must be considered. It may not be possible to repay the full loan balance where losses have been incurred. In this case, the debt forgiveness rules may also need to be contemplated.

If you wish to consider the repayment of an existing prescribed rate loan, we recommend that you discuss these considerations in further detail with your tax advisor.


Can I make a prescribed rate loan to my children?

Similar to the spousal loan, it may also be desirable for a high income earner to make a prescribed rate loan to a family trust for the benefit of his or her minor children. The investment income earned by the trust can be allocated to the beneficiaries to pay for expenses that directly benefit them.

This strategy will require a relatively large portfolio, even more so than a spousal loan. This is because the professional fees for this kind of structure are more significant as it can be costly to settle and operate a trust. Your lawyer will charge professional fees for preparing the trust deed, in addition to the loan agreement. Annual tax filings for the trust and ongoing legal paperwork will also be required. You should discuss these costs with both your accountant and lawyer, in advance, to understand whether the benefits outweigh the costs.


Why can’t I just give the funds to my spouse or children instead?

The “attribution rules” exist to prevent income splitting via gifts of income-producing properties to low-income family members, such as your spouse or minor children. If a taxpayer simply gifts investments, or cash to enable a spouse or minor child to purchase an investment, the income from that investment may be attributed back to the taxpayer and treated as income of the gifter, instead.

In other words, unless you also plan into an exception to the attribution rules, the income may still be taxed in your hands. One common way to plan into an exception to the attribution rules is the use of a prescribed rate loan.


What other options may be available?

It may also be possible for a lower income-earning spouse to invest all of their after-tax earnings while the higher income-earning spouse pays for the family’s household expenses. This alternative is only an option where the lower-income earning spouse has their own source of funds, such as from employment or an inheritance.

If your spouse has not yet fully utilized his or her Tax-Free Savings Account (TFSA), you could also give money to your spouse to invest in a TFSA. The attribution rules discussed above do not apply to TFSA investments.



Prescribed rate loans can provide potential long-term tax savings opportunities but careful planning is required. Working with your accountant and lawyer, an ATB Wealth advisor can determine if this opportunity is right for you.​​​​​​​​​​​​

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