Prescribed Rate Loan Strategy

A strategy to minimize taxes for couples or family members is through the use of a prescribed rate loan.  The idea of this strategy is to split the investment income from a family member in a higher tax bracket to a member with a lower tax bracket.  This strategy is most effective in a situation where one family member has significant assets and their income is taxed at a high marginal tax rate compared to other family members.

The income tax attribution rules that prevent income splitting between family members do not apply to direct intra-family loans to a spouse or a minor child when: (1) Funds are loaned and interest is charged at the CRA prescribed rate, and (2) The interest is fully paid within 30 days after the end of the year for the current year end and each prior year during which the loan was outstanding.

If the interest is paid late in a particular year, no subsequent year can qualify for this exception.

Please discuss with your tax advisor and lawyer to ensure that this strategy is appropriate to your circumstances and properly executed.

This article is intended for general information purposes only and does not constitute professional advice.  Income tax law and regulation change frequently and the content on this article may no longer reflect the current state of the law. If you have any specific questions, you should consult a professional services advisor or email us for further advice.