Prescribed rate loans to family: how they work in Canada

The problem a prescribed rate loan solves

Suppose one spouse earns a high income and the other earns little. Giving the lower-income spouse $100,000 to invest looks like an easy way to split the investment income. It is not. Under the attribution rules, income from property you transfer or lend to your spouse is generally treated as your income, and so are taxable capital gains and allowable losses on that property. The same idea applies to a related minor, meaning someone under 18 who does not deal with you at arm’s length or is your niece or nephew.

Our encyclopedia entry on the attribution rules covers the basics. This article is about the exception that lets a loan work.

The conditions the loan must meet

The CRA’s bulletin on spousal transfers and loans says the attribution rules do not apply to a loan when interest is charged at a rate at least equal to the lesser of the prescribed rate and the rate that arm’s length parties would agree on in similar circumstances. All of that interest must be paid no later than 30 days after the end of each calendar year in which it becomes payable. For a year ending December 31, that means January 30.

The bulletin adds that if the interest is not paid in time, the loan fails the test for that year and for any later year. Forgiving the loan also ends the protection. These conditions are strict and mechanical, so treat the January date as a hard deadline. The CRA’s bulletins on this topic are archived, so ask your accountant to confirm the current wording of the Income Tax Act.

What the prescribed rate is right now

The CRA announces prescribed interest rates each calendar quarter. For October 1 to December 31, 2026, the CRA lists 3% as the rate used to calculate taxable benefits from interest-free and low-interest loans. The CRA’s bulletin describes the prescribed rate as the rate set by the Income Tax Regulations. That page does not say which listed rate applies to family loans, and the archived bulletins use older wording, so confirm with your accountant that this is the figure to use for your loan.

The rate changes quarterly, so always check the CRA’s prescribed interest rates page for the quarter in which you set up the loan. This page does not confirm whether the rate is fixed for the life of an existing loan, so do not assume it. Ask how it applies to a loan you already have.

An illustration with round numbers

Assume you lend your spouse $100,000 at 3%, and the borrower invests it and earns $5,000 in the year. These figures are illustrative only. Your spouse owes you $3,000 of interest, to be paid by January 30 of the next year. You report that $3,000 as interest income. Your spouse reports the $5,000 of investment income and can generally claim the $3,000 interest paid, because interest on money borrowed to earn investment income is generally deductible.

The net income taxed at your spouse’s lower rate is $2,000, the amount by which the investments out-earn the interest. If the investments earn less than 3%, the arrangement can leave the family worse off, because you pay tax on interest your spouse is deducting at a lower rate. The loan only helps when the expected return comfortably exceeds the rate.

Where these loans go wrong

The most common failure is a late or missing interest payment. Set a calendar reminder, pay from the borrower’s own account, and keep the bank record. Another is informality: no written agreement, no stated rate and no proof that the money moved. If the CRA asks, you should be able to show a genuine loan.

Remember also that deductibility is not automatic. If an investment can only produce capital gains, the CRA does not allow the interest as a deduction. Income earned on the income, such as interest on interest that is left to accumulate, is generally not attributed back to you. Once a qualifying loan is repaid, attribution does not apply to income earned on the property afterward.

Children, trusts and other relatives

For a related minor, the CRA’s bulletin treats income from loaned or transferred property as the lender’s until the end of the year the minor turns 18. A loan to a minor, or to a trust in which a minor is a beneficiary, can use the same interest-rate exception. That adds legal and filing complexity, and other rules, such as the tax on split income, can apply to some income paid to family members.

Loans to other non-arm’s-length people, such as an adult child, fall under a separate rule. It can attribute income when one of the main reasons for the loan is to reduce or avoid tax, with an exception that follows the same interest-rate and 30-day payment conditions described above. Investing money in a child’s name is generally still reported by you, except for interest on Canada child benefit payments deposited in the child’s account.

Separation, death and corporations

Spousal attribution generally stops for periods after death, when the transferor is not resident in Canada, and when spouses live separate and apart because of a relationship breakdown. For capital gains after separation, the spouses must file a joint election. Talk to your accountant before relying on these exceptions.

A loan from your corporation to you is a different subject. Shareholder loans have their own repayment rules and a separate benefit calculation. See our articles on avoiding a shareholder loan income inclusion, and on income splitting options for families.

What to prepare before you lend

Bring a written loan agreement stating the amount, date, rate and payment date. Add proof of the transfer, the source of the funds and a plan to pay interest from the borrower’s own account. Ask your accountant whether the rate, your family’s tax brackets and your expected investment returns make the loan worthwhile, and how the interest should be reported by each person each year.