The CRA prescribes interest rates for various circumstances, such as the interest rate they will pay you if you overpay them or the interest you will owe the CRA if you are late on payments to them in various circumstances.

However, one notably prescribed rate is the amount of interest that must be paid on a "prescribed rate loan." This will be going from 1% to 2% on July 1, 2022.

Prescribed rate loans are used as a mechanism to income split, since they allow loans to related persons without triggering various attribution rules which would otherwise attribute the income back to the lender for tax purposes.

The rules related to prescribed rate loans and income attribution are beyond the scope of this article. However, they generally make sense if an individual in a high income tax bracket has significant capital they plan to invest passively1 (such as in the stock market) and they would like to transfer that income (and the associated tax) earned on those passive investments to a related party.

The key is that the interest the lender must pay to meet the requirements of a prescribed rate loan is the rate at the time in which the loan was initially made.2 This means that the interest which must be paid on a prescribed rate loan entered into on or before June 30th, 2022 will only be 1%, even as the prescribed rate may continue to go up over the years.

Since the prescribed rate has never been lower than 1% and is generally assumed it will not be that low again for a long time, locking in that prescribed rate now in a prescribed rate loan could significantly increase income splitting opportunities in the future.

Footnotes

1. While a prescribed rate loan is not strictly limited to being used for passive investments, there will be no advantage in the loan being invested in an active business which the lender is involved in, as the tax on split income will apply.

2. Provided the necessary other conditions are met.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.