Olena earns $210,000 annually. Her spouse, Teodor, works part-time and earns under $40,000. Their combined tax bill is substantially higher than it would be if income were distributed more evenly between them. The prescribed rate loan addresses exactly this gap.
How does a prescribed rate loan work in practice?
The higher-income spouse lends money to the lower-income spouse at the Canada Revenue Agency prescribed rate — currently 5% per year. The lower-income spouse invests those funds. Investment returns above the loan interest rate are taxed at the lower spouse's marginal rate instead of the higher one.
Does the interest actually need to be paid?
Yes. The interest must be paid by January 30 each year for the previous year. Missing even one payment collapses the attribution rules and CRA attributes all income back to the lender. This is the step most families fail to follow consistently.
When does the math favour this approach?
The gap between the two spouses marginal rates needs to be at least 15 percentage points for the strategy to meaningfully offset legal and accounting setup costs, which typically run between $1,200 and $2,000 initially.
Can this be done with a family trust instead?
A family discretionary trust can hold the invested funds and distribute income across multiple lower-income beneficiaries, including adult children. This expands the splitting advantage beyond a single recipient.
The loan must be documented formally with a signed promissory note. Verbal agreements do not satisfy CRA requirements.