What Is the Prescribed Rate Loan Strategy in Canada?

A prescribed rate loan is a written loan from a higher-income spouse to a lower-income spouse at the interest rate the Canada Revenue Agency publishes each quarter, made so that future investment income on that money is taxed in the lower-income spouse's hands instead of the higher earner's. It sidesteps the CRA's attribution rules — which normally tax spousal transfers back to the person who gave the money — because a properly documented loan with interest actually paid is a real commercial arrangement, not a gift. The two conditions that make it work are a signed promissory note and an interest payment made in cash every year by January 30.

That is the whole idea. Everything else is execution, and in this strategy the execution is where families either capture the benefit or quietly lose it.

Why the Gap Between Spouses Matters So Much

Canada taxes individuals, not households. That single design choice is what creates the opportunity. In Ontario for 2026, the combined federal and provincial marginal rate on ordinary income climbs past 50% at the top bracket, while someone with little or no income pays nothing on their first slice of earnings at all — the CRA's basic personal amount shelters roughly the first $16,000 of income federally for most filers. Two households with identical total income can therefore face very different tax bills depending on whose name the income arrives in.

That gap is not unusual. According to Statistics Canada, women aged 65 and over have consistently reported lower average after-tax income than men in the same age group — a difference driven in part by uneven CPP contributory histories and years out of the paid workforce. In many of the retired and near-retired households in London, Ontario, one spouse holds most of the pension income and most of the non-registered savings, and the other has room in the lower brackets that simply goes unused.

The prescribed rate loan is a way to use that room.

How the Mechanics Actually Work

The higher-income spouse lends a sum — say, from a non-registered investment account — to the lower-income spouse at the prescribed rate in force on the day the loan is made. The lower-income spouse invests the money in their own non-registered account and earns interest, dividends, or capital gains on it. Because the funds arrived as a documented loan rather than a gift, that investment income belongs to them and is reported on their return at their marginal rate.

Each year the lower-income spouse pays the higher-income spouse the interest owed on the loan, in cash, by January 30. That interest is taxable to the lender and deductible to the borrower as a carrying charge, because it was incurred to earn investment income. The net effect is that a small, fixed amount of income flows back to the high-bracket spouse while the portfolio's growth — the part that compounds — is taxed in the low bracket.

The CRA's quarterly prescribed interest rates are set from the average yield on three-month Government of Canada treasury bills in the first month of the preceding quarter, rounded up to the next whole percentage point. That formula is why the rate has swung from a low of 1% through much of 2020 and 2021 to substantially higher levels after the Bank of Canada raised its policy rate through 2022 and 2023, and back down as rates eased. The Bank of Canada's own inflation target — 2%, the midpoint of a 1% to 3% control range — is what drives those policy moves, and the prescribed rate follows along a quarter or two behind.

The rate is locked for the life of the loan

This is the part most people miss. Once a prescribed rate loan is in place at, for example, 3%, that loan stays at 3% for as long as it exists, even if the CRA's published rate later doubles. A loan made in a low-rate quarter is a durable advantage. The reverse is also true: a loan made at a high rate stays expensive, which is why some families choose to repay an older high-rate loan and establish a new one when rates fall — a step with its own tax consequences, since repaying may mean selling investments and realizing gains.

A Worked Example on a $900,000 Portfolio

Consider a retired London couple with $900,000 in a joint non-registered account, on top of their registered savings. Suppose one spouse has pension and RRIF income that puts them in a combined Ontario marginal bracket around 43%, and the other has modest income and sits closer to 20%.

Say the higher-income spouse lends $900,000 to the lower-income spouse at a prescribed rate of 3%, properly documented. The portfolio generates a 4% annual taxable return — $36,000 of dividends, interest, and realized gains.

Step by step:

• Before the loan: $36,000 of investment income taxed at roughly 43% → about $15,500 in tax.
• After the loan: the $36,000 is reported by the lower-income spouse. They deduct the $27,000 of interest they paid (3% of $900,000), leaving about $9,000 of net investment income taxed at roughly 20% → roughly $1,800.
• But the interest comes back: the higher-income spouse now reports $27,000 of interest income at 43% → about $11,600.
• Combined after: roughly $13,400 versus roughly $15,500 before — a difference of about $2,100 in that year.

The arithmetic here is deliberately simple and the rates are illustrative, not a forecast. Notice what drives the result: the benefit is proportional to the spread between the portfolio's return and the prescribed rate, multiplied by the gap in marginal rates. At a 1% prescribed rate the same portfolio would shift far more income into the low bracket; at a 5% prescribed rate on a portfolio returning 4%, there would be nothing to shift at all. This is exactly why the rate at the moment of setup matters more than almost anything else in the strategy.

"The prescribed rate loan only pays you back if the portfolio out-earns the loan rate — so I always start by asking what rate you'd actually be locking in, not whether the idea sounds clever."

— Marc Pineault, retirement planner in London, Ontario

The Two Rules You Cannot Bend

The loan must be documented in writing from day one. A signed promissory note stating the principal, the prescribed rate in effect at the time, and the repayment terms is what makes this a loan rather than a transfer. Without it, the attribution rules in the Income Tax Act pull the income straight back to the lender. Date the note, keep it, and keep the record of the funds moving.

The interest must be paid in cash by January 30 each year. Not accrued. Not netted against something else. An actual transfer, traceable in bank records, no later than January 30 for the previous calendar year. Miss that deadline once and the attribution rules apply for that year — and, critically, for every subsequent year the loan remains outstanding. There is no cure. The usual remedy is to unwind the loan and start a new one at whatever the current rate happens to be, which may be considerably less attractive.

A third habit is worth adding: file the interest payment on the lender's return as interest income and claim it on the borrower's return as a carrying charge. Reporting that is consistent on both sides is what a reviewer expects to see.

Who This Is Built For

The strategy earns its keep when three things are true at once: a real gap in marginal tax rates between the spouses, meaningful savings held outside registered accounts, and a prescribed rate that is comfortably below the portfolio's expected return. It tends to suit:

• Households where one spouse carries most of the pension, business, or employment income
• Couples with non-registered savings beyond their RRSP and TFSA room — and the CRA's TFSA dollar limit means most couples have used a great deal of registered space already before non-registered money accumulates
• A lower-income spouse with room left in the lower brackets before additional income pushes them upward
• Families planning over a decade or more, where a recurring annual saving compounds

It does nothing inside a TFSA, where growth is already tax-free, and nothing inside an RRSP or RRIF, where tax is deferred rather than split. The target is non-registered money that would otherwise throw off taxable income every single year.

There is also an interaction worth mapping. Shifting investment income away from the higher-income spouse lowers their net income, which is the figure Old Age Security recovery tax is measured against. For a household already navigating that threshold, this strategy sits alongside the planning covered in the OAS clawback strategy guide, and it interacts with the withdrawal order discussed in the RRIF withdrawal strategy guide. It also affects the arithmetic of drawing down registered money early, which is the subject of the RRSP meltdown guide. You can sketch the outlines of these interactions yourself with the free retirement planning calculators before sitting down with anyone.

Family trusts and minor children

A prescribed rate loan can also be made to a family trust that benefits minor children, which sidesteps the separate attribution rule for income split with minors. That version brings trust filing obligations, the tax on split income rules, and a 21-year deemed disposition into the picture. It is a legitimate structure, and it is genuinely more complex than the spousal version — worth professional tax and legal input rather than a template from the internet.

What Can Go Wrong

Three things, mostly. The first is a missed January 30 payment, which is permanent. The second is treating the taxable interest the lender receives as an afterthought — it is fully taxable at their top rate, and on a large loan at a higher prescribed rate it can consume most of the benefit. The third is forgetting that the loan is real: if the marriage or the plan changes, the principal is still owed, and the loan has to be dealt with alongside everything else.

None of this is exotic. The CRA does not treat a properly papered prescribed rate loan as aggressive planning; it treats it as a loan. The scrutiny falls on arrangements where the paperwork does not exist, the interest was never actually paid, or the money never really moved.

Where It Fits in a Plan

The prescribed rate loan is one tool among several for managing which pocket income lands in. Pension income splitting, CPP sharing, spousal RRSPs, and the timing of government benefits all do related work, and the best combination depends on the shape of a household's income over time rather than a single tax year. Marc Pineault, a retirement planner in London, Ontario, tends to look at this strategy alongside the CPP and OAS start-date decisions covered in the CPP timing guide, because the point is the shape of a household's taxable income across two or three decades — not the saving in any one year.

If your household has significant non-registered savings and a wide gap between two tax rates, this is a strategy worth understanding properly, with the current prescribed rate in front of you and your own numbers on the page.