The Canada Revenue Agency (CRA) has announced that the prescribed interest rate will drop from 4% to 3% effective July 1, 2025. This marks another decrease in the prescribed rate since the large run-up from 2022—and it opens the door to new tax-saving opportunities for individuals, families, and business owners.
Why the Prescribed Rate Matters
While the rate dropping has many benefits for taxpayers (such as a lower rate on overdue tax balances), the one we will focus on here relates to tax planning opportunities.
The prescribed rate sets the minimum rate of interest that must be charged on certain loans between family members or related entities to avoid the income attribution rules of the Tax Act. When the rate is lower, there is an opportunity for taxpayers to more effectively shift investment income to family members in lower tax brackets—provided the planning is implemented and documented correctly.
Key Planning Opportunities
Spousal Loans
A spousal loan involves a higher-income spouse loaning funds to a lower-income spouse for investment purposes. As long as the loan is made at the prescribed rate in effect at the time of the loan, and interest is paid annually by January 30 of the following year, any investment income earned on the borrowed money is taxed in the hands of the lower-income spouse. The lower the prescribed rate is at the time of the loan, the bigger the potential benefit of this strategy.
Family Trust Loans
Using the same principles as the spousal loan, parents or grandparents can lend funds to a family trust at the prescribed rate, and the trust can invest and allocate income (in excess of the interest charged on the loan) to minor children, for allowable expenses. With a lower prescribed rate, more income can potentially be shifted to other family members, while minimizing the attribution back to the lending adult.
Click here to learn more about Family Trusts for Business Owners
Investment Holdco Loans
A shareholder may loan funds to a holding company (Holdco), in which family members have shares, for investment purposes. The Holdco can earn investment income in excess of the interest cost, possibly allowing for tax deferral and more flexibility in income splitting with family members that are shareholders of the Holdco.
As is always the case when considering tax planning maneuvers, it is crucial to get tax and legal advice from professionals to implement the planning above, as any misstep along the way can have severe unintended income tax implications.
Considering a Prescribed Rate Loan?
GGFL’s tax advisors can help you assess whether these strategies make sense for your specific situation, and can help to ensure they’re implemented in compliance with CRA requirements.
