Wealth Strategies: Family Income Splitting - CRA NEW Reduced Loan Rate

Milestone Wealth Management Ltd. - Jul 08, 2020
The accounting firm Bennett Jones has written up an insightful update below on how to effectively income split with family members in order to reduce your overall household tax load. If you wish to learn more and discuss how this might be applicable

The accounting firm Bennett Jones has written up an insightful update below on how to effectively income split with family members in order to reduce your overall household tax load. If you wish to learn more and discuss how this might be applicable to your specific financial situation, please feel free to call us at (403) 531-2444 or reach out to your individual Milestone Wealth Management Advisor.

If you have a family member who is in a lower tax bracket than yourself, an upcoming change in the Canada Revenue Agency's ("CRA") prescribed interest rate will create a financial opportunity. Effective July 1st, 2020, the prescribed interest rate will drop to 1% , increasing the tax advantages available through the utilization of a prescribed-rate loan to income split with spouses, children, grandchildren or other family members.

How It Works - For Individuals and Trusts

Recall that due to graduated tax rates, income taxes payable by a high-income family member ("HIFM") are calculated at a higher percentage than taxes payable by a low-income family member ("LIFM").

Step one: A HIFM makes a loan to a LIFM, which has an interest rate at the "prescribed rate" (i.e. 1% as of July, 2020).

Step two: The LIFM invests the loaned funds (the "Funds").

Step three: The LIFM pays interest calculated at the prescribed rate to the HIFM, by January 30th of the next year.


  • Any capital gains, interest, dividends or other income earned on the Funds (collectively, the "Income") in excess of the prescribed interest rate - soon to be 1% - is taxed in the LIFM's hands.
  • The interest income is taxable to the recipient. However, this nonetheless creates an opportunity, reducing the aggregate taxes paid by the family group, as taxes on the Income are calculated at a marginal rate that is lower than the rate applicable to the Income earned by the HIFM.
  • For greater clarity, if the HIFM did not make the loan but instead invested the Funds personally, taxes on the Income would be calculated at the rate applicable to their personal income bracket, which would typically be higher than that applicable to the LIFM's income bracket.

This strategy also can be implemented through a family trust. If a trust is used, a HIFM will provide a prescribed rate loan to the trust. The trust invests the loaned funds and pays annual interest on the loan at the prescribed rate. Any income earned in excess of the prescribed rate can be allocated to the trust's beneficiaries and will be taxed at the (presumably) lower rate of the beneficiaries (i.e. the beneficiaries are the LIFM).


The following chart details the tax results of a prescribed rate income splitting plan for a family group. Assume an investment of $200,000 which generates an annual return of 5%, or $10,000 per year:


Investments held directly by high-income family member

Prescribed rate loan at 1%

Taxable investment income



Tax payable by high-income family member - assuming an average tax rate of 38.76%


$775.20 (tax on $2,000 interest received on loan)

Tax payable by low-income family member - assuming an average tax rate of 17.32%



Tax savings year 1



Tax savings year 10



Attribution Rules

Attribution rules in the Income Tax Act prevent certain forms of family income splitting by attributing income or gains earned on property acquired with transferred funds back to the transferor. However, these rules contain an exception, which effectively 'turns off' such attribution, when the transfer occurs by way of a prescribed rate loan with interest, and such interest is paid annually by January 30 the following year (including for the stub period in the year in which the loan is made).

Thus, clients who have income splitting loans should ensure that the interest on such loans in a given year is paid to the HIFM (i.e. the transferor) by January 30th of the following year in order to avoid the attribution rules (i.e. avoid the income on the Funds being attributed to the HIFM and taxed in their hands, which would defeat the purpose of the planning). It is important to note that the failure to pay the interest in a particular year will cause the attribution rules to apply thereafter.

Significant Information

The prescribed rates are set by the CRA quarterly according to a formula set out in the Income Tax Regulations (s. 4301(c)), which calculates the interest rate as an average of the rates for Government of Canada three month Treasury bills during the first month of the preceding quarter. While prescribed interest rates vary quarter by quarter, for the income splitting purposes described here, the interest rate for a prescribed rate loan made to a family member will be fixed at the rate on the date the loan is made. Therefore, if the prescribed rate increases again in the future, the current rate will remain in effect for as long as the loan is outstanding.