Income-Splitting Opportunity Weakened - "Prescribed Rate" to Increase April 1, 2018

Prescribed Rate Increase

The recent increase in the interest rate by the Bank of Canada means that a great income-splitting opportunity is about to be weakened, as the “prescribed rate” will increase on April 1, 2018 from 1% to 2%. As such, many taxpayers should consider taking advantage of the narrow window to structure their affairs before that change in rate becomes effective.


Each quarter’s “prescribed rate” is the rounded-up interest rate paid on 90-day treasury bills as set three months prior to the beginning of the quarter. Since the January T-bills rate exceeded 1%, we know that the prescribed rate will be increased to 2% effective the second quarter of 2018 (April 1, 2018 to June 30, 2018).

This prescribed rate is used in many calculations, such as:

  • Interest benefit on shareholder loans;
  • Corporate attribution rules; and
  • The interest rates charged and paid by Canada Revenue Agency.

Most of these calculations would be better described as the facts of life, rather than planning opportunities, as they float up and down with the prescribed rate. There is one application of the prescribed rate that can result in highly effective planning, and carries the added benefit of staying fixed regardless of future increases in the prescribed rate – spousal loans.

Spousal loan

When someone loans money to their spouse, and the spouse invests the money, the lender is deemed to receive all investment income earned from the loan. The key exception is if the loan carries an interest rate of at least the prescribed rate in effect at the time the loan is made. The exception collapses if the annual interest on the loan is not paid by January 30 of the following year.

A spousal loan will allow the lender to have their investment income capped at the interest rate on the loan at the time the loan is established (1% if established prior to April 1, 2018). If the debtor’s rate of return on loan proceeds exceeds 1%, there is a shifting of income from the lender’s effective tax bracket to the debtor’s effective tax bracket. The debtor will be able to deduct the 1% interest paid from their income, so no double-taxation will occur.

If the spousal loan strategy is employed and the prescribed rate continues to be at 2% or higher, it is still quite possible that future spousal loans will be beneficial, but separate loans should be employed and documented. Similarly, if there are multiple loans outstanding, any loan payments should be clearly indicated as to which loan is being paid down (and of course the preference would be for higher-rate loans to be paid down before lower-rate loans.


While spousal loans are always effective so long as the rate of return exceeds the applicable loan’s interest rate, taxpayers have a narrow window remaining to lock in the low rate of 1% and reap the benefits of true income-splitting which are not subject to the newly proposed tax on split income rules.

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