Prescribed Rate Loans: Splitting Investment Income With a Spouse
Move $500,000 into your spouse’s investment account and nothing changes on the tax return. The Income Tax Act deems the income and the gains back to whoever handed the money over, so the gift and doing nothing cost the same. One door leads out: the prescribed rate loan. Lend it instead, at the rate the Act prescribes, and attribution stops. As of 23 September 2026 that rate is 3%.
Two things are worth settling first. The prescribed rate is a step function whose nearest step is far from where yields sit, so the urgency is oversold. And it is not a shelter but a spread, between the portfolio’s return and the interest rate, and the spread can be negative.
The gift that changes nothing
Section 74.1(1) kills the obvious plan. Where an individual “has transferred or lent property … to or for the benefit of” a spouse or common-law partner, that person’s income from the property “is deemed to be income … of the individual … and not of that person”. Section 74.2(1) does the same for capital gains, which are “deemed to be a taxable capital gain of the individual” and, by 74.2(1)(e), not the recipient’s. The lower bracket never gets used.
The exception, and its two hard edges
The way out is subsection 74.5(2). It switches both sections off if three conditions hold. Interest must be charged at a rate at least equal to “the prescribed rate that was in effect at the time the loan was made”, or a lower arm’s length rate. The year’s interest must be “paid not later than 30 days after the end of the particular year”. So must the interest for “each taxation year preceding the particular year”.
Those phrases carry the structure. The rate attaches on the day the loan is made and never resets, however high the prescribed rate later goes. The third condition reaches backwards: one missed payment disqualifies the loan for that year and every year after it. For 2026 the deadline is 30 January 2027. Worth reading once, at section 74.5 of the Income Tax Act on the Justice Laws website. (A sibling exception at 74.5(1) covers outright transfers for value.)
The rate is 3%, and it is stickier than the pitch suggests
Nobody picks the prescribed rate. Section 4301 of the Income Tax Regulations builds three rates off one base: plus 4% on amounts owed to the Receiver General, plus 2% on a non-corporate taxpayer’s overpayment, and under 4301(c) the bare base for “every other provision of the Act in which reference is made to a prescribed rate of interest”. The spousal loan sits in that third bucket. The base is the mean yield on three-month Government of Canada treasury bills auctioned in the first month of the preceding quarter, “rounded to the next higher whole percentage”.
In the Bank of Canada Valet series for three-month treasury bill auction average yields, July 2026 printed 2.29% on 14 July and 2.29% on 28 July: a mean of 2.2900%, rounded up to 3%. April’s 2.32% and 2.29% average 2.3050% and also round up.
CRA gets there too. CRA’s prescribed interest rates page for the fourth quarter of 2026, covering 1 October to 31 December, shows 7% on overdue taxes, 3% on taxable benefits and employee and shareholder loans, and 5% on non-corporate refunds. Subtract the statutory spreads and every row collapses to the same base: 7 minus 4 is 3, and 5 minus 2 is 3.
Now the timing question. Because the rounding goes up to a whole percentage rather than to the nearest, the rate is a step function and the steps sit far from current yields. The most recent auction on file is 22 September 2026 at 2.39%. To step up to 4%, the October mean has to exceed 3.00%, 61 basis points away. To step down to 2%, it has to land at or below 2.00%, 39 basis points the other way.
October’s auctions have not been held, so the first quarter 2027 rate is unknown. The overnight rate target is 2.25%, held since 30 October 2025. As of 22 September 2026, Montreal Exchange one-month CORRA futures settlement prices had 11.63 basis points priced into the 28 October 2026 decision: a 47% implied chance of a hike, an implied rate of 2.37%. One 25 basis point move does not carry an auction mean 61 basis points higher. So 3% is sticky in both directions, and “lock it in before the rate rises” is true only because the rate never resets once made, not because a rise looks imminent on this data.
Government of Canada three-month treasury bill auction average yields. Source: Bank of Canada Valet series V80691303, auctions of 9 September 2025 to 22 September 2026; banding per Income Tax Regulations s. 4301(a)(i).
The arithmetic: a spread, and it can be negative
Both ends of the interest are taxed. Paragraph 12(1)(c) puts “any amount … on account of … interest” into the lender’s income, and subparagraph 20(1)(c)(i) lets the borrower deduct it only for “borrowed money used for the purpose of earning income from a business or property”. The family therefore gains only on the part of the return that exceeds the interest, and only at the difference between the two marginal rates. Below the prescribed rate the flow runs backwards.
Against real brackets, an Ontario couple in the 2026 tax year: a lender with $250,000 of base taxable income and a 49.53% marginal rate, a borrower with $45,000 and a 19.05% marginal rate, and a $500,000 loan at 3%, which is $15,000 of interest a year. Federal and Ontario 2026 brackets, basic personal amounts and the Ontario surtax; the Ontario health premium and CPP and EI are excluded. Data as of 23 September 2026.
The table treats the portfolio’s return as ordinary income, which is what interest attracts. Eligible Canadian dividends and capital gains run on different schedules, set out in our guide to how investment income is taxed in Canada, and they move these numbers. The interest on both sides of the loan is always ordinary income. What the portfolio earns may not be.
| Return on the $500,000 | Portfolio income | Family tax, no loan | Family tax, with loan | Family saves |
|---|---|---|---|---|
| 0% | $0 | $93,983 | $98,816 | -$4,833 |
| 1% | $5,000 | $96,460 | $99,768 | -$3,309 |
| 2% | $10,000 | $98,997 | $100,721 | -$1,724 |
| 3% | $15,000 | $101,673 | $101,673 | $0 |
| 4% | $20,000 | $104,350 | $102,626 | $1,724 |
| 5% | $25,000 | $107,026 | $103,624 | $3,402 |
| 6% | $30,000 | $109,703 | $104,877 | $4,825 |
| 7% | $35,000 | $112,379 | $106,360 | $6,019 |
| 8% | $40,000 | $115,056 | $107,842 | $7,213 |
The “no loan” column is also the gift and do-nothing columns: 74.1(1) and 74.2(1) put everything back on the lender either way. Break-even is the prescribed rate itself. At 2% the couple pays $1,724 more tax with the loan than without it. The structure puts $15,000 of interest onto a return taxed at 49.53% while moving only $10,000 of portfolio income onto one taxed at 19.05%. A spread, not a shelter, and it can run the wrong way.
The back of the envelope needs one adjustment: income above the interest times the gap in marginal rates gives $3,048 at a 5% return against an exact $3,402, the $355 difference being the borrower climbing a bracket as the income lands.
Combined federal and Ontario tax saved in a year on a $500,000 loan at 3%. Source: our calculation on CRA federal and Ontario 2026 rates and income brackets and CRA T4032ON, January 2026 edition, at the Q4 2026 prescribed rate of 3%.
Four places the structure breaks
The 30 January deadline. The failure mode that actually happens. Paragraph 74.5(2)(b) wants the year’s interest paid within 30 days of year end, and (c) wants the same of every prior year. Miss one January and the loan is finished, for that year and permanently after.
Lend cash, not shares. Handing over securities already in the account will not do, because moving securities instead of cash is a disposition at fair market value and the gain is the lender’s.
Use, not intention. Subparagraph 20(1)(c)(i) turns on money used to earn income from a business or property. A portfolio bought purely for capital appreciation is a weaker claim on that language than one paying dividends or interest. A question for a tax adviser, not a settled one.
The anti-avoidance plumbing. Subsection 74.5(6) deems property routed to a spouse through a third party to have been lent by you anyway. Subsection 74.5(7) does the same to a third party’s loan to your spouse where you are “obligated, either absolutely or contingently, to effect any undertaking” to ensure its repayment, and interest you pay that third party does not count as the interest the exception demands.
Where no loan is needed at all
Subsection 74.5(12) lists transfers that sections 74.1 to 74.3 do not reach, and two cover most couples. Paragraph 74.5(12)(a) exempts an RRSP premium where the spouse is “immediately after the transfer, the annuitant”, to the extent it is deductible to the individual. That is the spousal RRSP, which does the same job without the annual paperwork. Our RRSP guide covers spousal plans and the three-year attribution rule on withdrawals.
Paragraph 74.5(12)(c) exempts a transfer made while the property “is held under a TFSA or FHSA of which the spouse or common-law partner is the holder”, to the extent the spouse has no excess TFSA or FHSA amount at the time. That is why funding a spouse’s TFSA is clean, and our TFSA guide sets out the contribution room the exemption depends on.
Children, and separation
Subsection 74.1(2) attributes income from property lent or transferred to a person under 18 who does not deal at arm’s length with the individual. Section 74.2 reaches only a spouse or common-law partner, so capital gains a minor realises are not attributed back, and the tax on split income does not fill that hole: 120.4(1)(a)(i) and 120.4(4) both carve out “shares of a class listed on a designated stock exchange”. Private company shares are a different regime.
Separation has its own rule. Under 74.5(3), where spouses are living separate and apart because of a breakdown of the marriage or common-law partnership, 74.1(1) stops applying to income relating to that period, and 74.2 stops applying to a disposition in that period if a joint election is filed.
Scope and caveats
One province, one tax year, one set of assumptions. The Ontario figures move with the brackets and the surtax, but the shape does not: break-even sits at the prescribed rate wherever you live, because both sides of the interest are taxed at the same two rates that decide the benefit. Loans made into a trust rather than directly to a spouse run through subsections 74.3 and 74.5(9) and are not covered here. Neither is what CRA expects by way of documentation: the Act requires interest to be charged and paid, and nothing consulted for this piece sets out the paperwork that proves either. A prescribed rate loan is a long-lived legal obligation with a January deadline attached to it every year for as long as it runs, so it is worth putting in front of a tax professional who can see the whole return, not just the portfolio.
Disclaimer: The content on bestcanadianstocks.ca is for informational and entertainment purposes only and does not constitute financial advice. Past performance is not indicative of future results. Always consult a qualified financial advisor before making investment decisions. Income Tax Act sections 12, 20, 74.1, 74.2, 74.3, 74.5 and 120.4 and Income Tax Regulations section 4301, from Justice Laws, fetched September 23, 2026. CRA prescribed interest rates for the third and fourth quarters of 2026, fetched September 23, 2026. Treasury bill auction average yields and the overnight rate target from the Bank of Canada. Implied odds on the October 28, 2026 decision from Montreal Exchange one-month CORRA futures settlement, September 22, 2026. Federal and Ontario 2026 brackets, basic personal amounts and the Ontario surtax from CRA “Current year tax rates and income brackets (2026)” and CRA T4032ON, January 2026 edition. All tax arithmetic is ours, from a rate engine validated against Ontario’s published 53.53% top combined marginal rate before it computes anything.
