Thinking about income splitting to achieve your investment goals? Act fast, the minimum interest rate will double on July 1

As the CRA prepares to double its prescribed interest rate on July 1, now is the time to take advantage of an income-splitting exception to the attribution rules. When handled correctly, using this exception will lock in the current rate and save you thousands of dollars in taxes.

Here’s how to do it and why you need to act fast:

Understanding income splitting

Income splitting can be achieved by couples and families consisting of one high-income earner and one low-income earner, or through family trusts. If done correctly, income splitting essentially transfers funds to the low earner, allowing that income to be taxed at a lower bracket.

The Income Tax Act’s attribution rules stop most types of income splitting of investment earnings. For example, investment earnings (including some capital gains) achieved through transferred money or gifts are taxed at the tax rate of the person transferring the money, rather than the person actually investing the funds. However, there’s an exception when using what’s referred to as a prescribed rate loan.

Using the prescribed rate loan strategy to your advantage

If money is loaned to the lower-income family member instead of gifted, and they use this money for investment opportunities, any investment earnings will be taxed at the lower-income spouse’s income tax rate.

At a minimum, the loan’s interest rate must be set to the CRA’s prescribed interest rate at the time the loan is made. The receiving spouse must pay the loan back with interest. The interest paid back to the higher-income spouse will be taxed at their higher tax bracket. The interest will also be deductible against the investment earnings of the lower-income spouse.

This means any loans given before July 1 can have an interest rate as low as one percent. By extending a loan before July 1, you’ll be able to lock in the current rate for the duration of the loan, even if the CRA continues to increase rates. This could potentially save you thousands in taxes every year.

It is important to remember that the interest must be paid annually by Jan. 30 of the following year. A prescribed rate loan strategy could be in place for years so it is possible to lose track of the interest payment requirement. However, missing this requirement could have serious tax consequences as not only would attribution apply for the current year but for all future years with respect to investments purchased with those loaned funds.

Income splitting with your spouse

When one spouse is in a high tax bracket (John), and one is in a lower tax bracket (Leslie), it makes sense to use the investment income splitting method to ensure that the investment income is taxed at the lower bracket.


John works with his financial advisor to loan Leslie $400,000 at the 1% interest rate using a promissory note and loan agreement. (This type of agreement should be organized by a trusted tax specialist, such as Zeifmans.)

Leslie then invests that sum (in her name) in an investment portfolio that includes Canadian dividend-paying stock with a yield of 3%.

Starting the year after John extended the loan, Leslie pays John $4,000 (the 1% interest on the loan) from the $12,000 in dividends she receives. According to the Income Tax Act, these payments must be made by Jan. 30 each year.

The tax benefits arise as the dividends are taxed in Leslie’s hands at a lower rate than if they were in John’s. While the 1% interest on the promissory note is considered interest income and taxed at John’s higher rate, Leslie can claim a tax deduction because it was paid to earn income.

How to income split using a family trust strategy

If you’d like to split your income with other family members, like your children, you can do this through the family trust method. Family trusts are typically created for children by their parents (or by an older family member). If a trust is properly structured, higher-income family members can help fund the trust by loaning capital at the current CRA-prescribed interest rate. This capital must be used to pay expenses for the child or as a source of income for them alone.

How it works:

The trustee invests the funds, and any investment earnings (minus interest) can be distributed out to the beneficiaries, which would be taxed at each beneficiaries’ marginal tax rate. If the beneficiaries are children, they may end up paying little or no tax on the investment income.

With the use of a trust, you can direct funds to your children to pay for their expenses. This is a great way to provide them with money to pay for expenses like school and extracurricular activities, without paying high taxes on investment income, since it will be taxed in your children’s hands.


John has a 5-year-old son, Arthur, who attends private school.

John created a family trust and named Arthur as the beneficiary. He decides to loan the trust $700,000 at 1%. The funds are invested in Canadian dividend-paying securities, which yield 3% or $21,000 each year.

The trust must pay John $7,000 in annual interest, by January 30 of the following year. This means $14,000 of dividend income can be paid out to the beneficiary (Arthur), for his education costs. Depending on which province Arthur lives in, he would either not have to pay tax at all on the $14,000 of investment income or would have to pay minimal provincial tax.

Ensuring a smooth process

While the investment exception can be beneficial, there are specific requirements that need to be met to ensure it remains effective on an ongoing basis. To avoid any costly mistakes that could lead to negative tax consequences, it’s imperative to speak to your Zeifmans advisor to ensure everything is set up properly and maintained, especially if you’re using the family trust strategy. Zeifmans has decades of tax experience and works hard to help families and entrepreneurs get the most out of their money. Reach out to us today to speak to a tax advisor.


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, ...