What Is the Prescribed Rate Loan Strategy in Canada?

If you and your spouse are in very different tax brackets, there is a good chance your family is paying more tax on investment income than it has to. Canada taxes each person individually, which means a household where one person earns a high income and the other earns little or nothing can face a combined tax bill that is far steeper than necessary. The prescribed rate loan strategy is one of the most well-established ways to close that gap. It is not a loophole — it is a technique explicitly permitted by the Canada Revenue Agency (CRA), provided you follow the rules precisely. Marc Pineault, a financial planner in London, Ontario, regularly walks clients through this strategy as part of broader tax-efficient investing conversations.

How the Prescribed Rate Loan Actually Works

The mechanics are straightforward. The higher-income spouse lends a sum of money to the lower-income spouse at the CRA's official prescribed interest rate. The lower-income spouse takes those funds and invests them — typically in a non-registered account — and earns dividends, interest, or capital gains on the investment. Because the money was properly loaned, the investment income belongs to the lower-income spouse and is reported on their tax return, where it is taxed at their lower marginal rate instead of the higher-income spouse's rate.

The higher-income spouse is not giving the money away. They receive interest payments from the lower-income spouse each year at the prescribed rate, which is a modest amount and is taxable to them. The lower-income spouse can deduct the interest they pay as an investment expense, reducing their taxable income further. The overall result is that the bulk of the investment growth is taxed at the lower rate, while only the small interest amount flows back to the higher-income spouse.

Over a long investment horizon, this difference in tax rates can add up to a meaningful and recurring saving for the family.

Why Timing and Documentation Are Everything

The CRA prescribed rate is set quarterly based on the yield on 90-day Government of Canada treasury bills. The significant planning opportunity is this: once a loan is in place, the rate is locked in for the life of the loan. Even if the CRA raises the prescribed rate in future quarters, an existing loan keeps its original rate. This is why the timing of when you establish the loan can matter considerably.

Two rules must be followed without exception:

First, the loan must be documented in writing from day one. A signed promissory note that clearly states the loan amount, the interest rate, and the repayment terms is not optional — it is what separates a legitimate prescribed rate loan from a simple transfer of funds, which the CRA would attribute back to the original owner.

Second, interest must be paid in cash by January 30 each year. If the lower-income spouse misses this deadline, the CRA's attribution rules apply to all investment income earned during that calendar year — meaning it gets taxed in the higher-income spouse's hands as though the loan never existed. Consistent missed payments can threaten the entire arrangement permanently.

Who This Strategy Is Designed For

The prescribed rate loan strategy works best when there is a real and meaningful gap between the two spouses' marginal tax rates. It is worth exploring when:

• One spouse earns significantly more than the other through employment, a business, or pension income
• The couple has savings sitting in non-registered accounts outside their RRSP and TFSA
• The lower-income spouse has room to absorb additional investment income without moving into a higher bracket
• The family is building wealth over a multi-year or multi-decade horizon

This strategy does not apply to registered accounts. Money inside a TFSA is already sheltered from tax, and RRSP growth is deferred — so a prescribed rate loan adds no benefit in either of those environments. The planning is aimed squarely at non-registered savings that would otherwise generate taxable investment income year after year.

Families with minor children can also use a prescribed rate loan through a family trust, though income splitting with minors involves additional CRA rules that require careful professional guidance.

What to Watch For

The CRA is attentive to income-splitting arrangements, and attribution rules exist precisely to catch informal transfers between spouses that have no economic substance. A properly documented prescribed rate loan — with actual cash interest payments on record each year — is what distinguishes a compliant strategy from one that will be unwound on audit.

Keep clear records of every interest payment. The interest must be paid in actual funds, not just tracked on paper. And factor in the taxable interest income the higher-income spouse receives each year when you are calculating the real net benefit of the arrangement.

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The prescribed rate loan strategy can deliver genuine, repeating tax savings for families where investment income would otherwise be taxed at the higher spouse's rate — but the execution details matter as much as the concept. A missed payment or informal transfer can undo years of careful planning. If you want to understand whether this approach fits your household, Marc Pineault works with families across London, Ontario and the surrounding region to build tax-efficient plans grounded in their actual numbers. Book a consultation to explore where a strategy like this belongs in your financial picture.

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This article is for educational purposes only and does not constitute personalized financial advice. Please consult a qualified financial planner before making any financial decisions.