Act now before April 1: CRA prescribed interest rate hike not an April fool’s joke

The Canada Revenue Agency’s (“CRA’s”) prescribed interest rate has remained largely unchanged at 1% per annum since April, 2009.  This low interest rate environment will likely come to an end on April 1, when the prescribed interest rate is expected to increase to 2% per annum. While a 1% hike may not seem like much, it will reduce the benefit of a tax planning strategy that families across Canada have been using for years.  This strategy consists of a higher income spouse loaning funds to a lower income family member, who will be taxed on investment earnings at a lower rate.

By putting such a loan in place before the April rate increase, you can still achieve optimal tax savings.  This is because it is completely acceptable to lock in the interest rate of the loan to a family member at the existing 1% per annum prescribed rate for the entire term of the loan. By implementing a prescribed rate strategy today, before the expected April increase, you will be in a position to save a significant amount of taxes for years to come.

The prescribed rate loan strategy at a glance

Suppose one spouse earns the majority of the family’s income and is in the top tax bracket. The other spouse, or other low income family members, are in the lowest tax bracket. If the higher income spouse uses his or her after tax income to invest, then the investment earnings will be taxed at his or her top marginal tax rate. The top Ontario marginal tax rate is 53.53%.

To lower the family’s tax burden, the higher income spouse can lend funds to the lower income spouse or low income family member to invest. Any subsequent investment earnings will then be taxed in the hands of the lower income spouse or family member, and therefore at a lower tax rate – resulting in significantly less taxes being paid. The key to this strategy is that the higher income spouse must charge interest on the loan at the CRA’s prescribed rate of interest, and the interest must be paid no later than 30 days after the end of the taxation year. The interest paid is taxable to the higher income spouse and is deductible to the lower income spouse.

If the interest is not paid, or if the money is instead gifted to the spouse, then the benefits of the foregoing tax plan will not be achieved.

A numerical example

Let’s imagine that Mrs. A is an engineer earning $250,000 per year, and Mr. A is a stay-at-home parent earning $10,000 per year through various minor consulting jobs.

Every $1 of additional income that Mrs. A earns will be taxed at 53.53%, and every additional $1 of income that Mr. A earns will be taxed at 20% (up to $43,000). If Mrs. A were to lend $500,000 to Mr. A to invest, and the investments yielded a 7% per annum return, the following would be the tax implications as compared to Mrs. A investing the $500,000 personally:

Prescribed Rate Loan Strategy Personally Invested
Investment and Loan Amount $       500,000 $  500,000
Yield 7% 7%
Investment Earnings $          35,000 $    35,000
Loan interest / investment earnings taxable to Mrs. A $            5,000* $    35,000
Mrs. A’s tax on investment income (53.53%) (A) $            2,677 $    18,735
Investment earnings net of loan interest taxable to Mr. A $          30,000 $                   –
Mr. A tax on income (20.05%) (B) $            6,015 $                   –
Total investment income earned $          35,000 $    35,000
Total tax paid (A + B) $          (8,692) $  (18,736)
After-tax investment earnings $          26,309 $    16,265

*At the current 1% per annum prescribed rate of interest on the loan

As a result of using the prescribed rate loan strategy, there is a tax savings of over $10,000, or more than a 60% additional return on investment. Had minor children, through a trust, been included in the strategy, the tax savings and therefore additional return on investment would be even higher.

How will the rate hike affect income splitting families?

After March, when the prescribed rate is expected to increase to 2% per annum, the tax savings of this loan strategy will be reduced to approximately $8,000, versus $10,000 achieved at the current 1% per annum rate. Though the strategy would still be better than investing personally, the return is 20% less than if the prescribed rate loan was at 1% per annum.


Save today by locking in the current prescribed rate

As mentioned above, by putting a loan in place before the expected rate increase on April 1, families still have the opportunity to lock in a loan at the existing 1% per annum prescribed interest rate for the entire term of the loan.  Adding a family trust for minor children to this strategy would result in even greater savings now, and for years to come.  For more information on how to benefit from the current prescribed interest rate on investment loans, contact your Zeifmans advisor today at 416.256.4000, Jonah Bidner, Partner at or David Posner, Partner at

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Q&A with Partner, Jennifer Chasson

Q&A with Partner, Jennifer Chasson

With over 25 years of experience and 100+ successful transactions under her belt, Partner, Jennifer Chasson, brings invaluable expertise to the table. Whether it’s guiding as an advisor, mentor underwriter, ...