The CRA prescribed rate is 3% in 2026. If your household has a significant income gap, this legal loan strategy can save thousands in taxes every year.
Not tax advice. Prescribed rate loans involve specific legal requirements under the Income Tax Act. This guide explains the general mechanics. A tax professional or fee-only financial planner should be consulted before implementing this strategy, as errors can invalidate the arrangement and trigger attribution rules.
Canada doesn't allow married couples to file taxes jointly like the U.S. Every dollar of investment income is taxed in the hands of whoever earned it. That's where attribution rules come in — and where the prescribed rate loan offers a legal path around them.
Canada's attribution rules (Section 74.1 of the Income Tax Act) exist to prevent the obvious tax manoeuvre of transferring money to a lower-income spouse to invest, then claiming the investment income at the lower marginal rate. If Partner A (in the 48% tax bracket) simply writes a cheque to Partner B (in the 26% bracket), the investment income earned by Partner B's portfolio is attributed back to Partner A and taxed at Partner A's higher rate. Nothing is gained.
The prescribed rate loan is the CRA-blessed exception. By structuring the transfer as a formal loan at the CRA's prescribed interest rate — rather than a gift — attribution is avoided. The investment income earned by the lower-income spouse genuinely stays in their hands, taxed at their lower rate.
The mechanics are straightforward but the execution details are critical:
The January 30 deadline is not optional. If the borrowing spouse fails to pay the prescribed rate interest by January 30 of the year following the year the interest accrued, the entire arrangement collapses. Attribution kicks in retroactively for that year and all future years. This is the single most common way prescribed rate loans fail. Set a calendar reminder.
The CRA prescribed rate is set by CRA each quarter under Section 4301 of the Income Tax Regulations. It's based on the yield on 90-day Government of Canada treasury bills, rounded up to the nearest whole percentage point.
Critically: the rate that applies to your loan is the rate at the time the loan is established — and it's locked in for the life of the loan. If you establish a loan when the prescribed rate is 3%, you pay 3% forever, even if the prescribed rate rises to 5% later. This is why periods of low prescribed rates are the ideal time to set up these arrangements.
| Period | Prescribed Rate | Strategy Value |
|---|---|---|
| 2020–2022 (COVID era) | 1% | Extremely attractive — most setups from this era still use 1% |
| 2023–Q1 2024 | 5–6% | Poor — borrowing cost too high vs investment return |
| Late 2024 onwards | 3% | Solid — worthwhile if investment return exceeds 4–5% |
| Q1 2026 (current) | 3% | Good window to establish new loans |
Partner A (higher income): $180,000 employment income — marginal rate approximately 48%
Partner B (lower income): $40,000 employment income — marginal rate approximately 29%
Loan amount: $200,000 | Prescribed rate: 3% | Annual interest charged: $6,000
Assumed investment return: 6% per year = $12,000 gross return on $200,000
Without the loan (attribution applies):
With the prescribed rate loan:
Rough illustration only. Actual savings depend on income levels, province, investment type (dividends receive preferential treatment), and specific circumstances. These numbers simplify several real-world factors.
The savings grow larger as the income differential between spouses increases, as the loan amount increases, and as the investment return exceeds the prescribed rate by a wider margin. Couples with very large income gaps in high-tax provinces like Ontario and B.C. see the most benefit.
A verbal agreement or a bank transfer with a note is not sufficient. A written promissory note or loan agreement must be in place. At minimum, the document should include:
The borrowing spouse must also actually pay the interest by January 30 each year. "Paper" payment (journal entries, promises to pay later) does not satisfy the requirement. Real cash or a bank transfer from borrower to lender must occur.
Can the lender forgive the interest? No — if the lender waives or forgives the interest, the arrangement fails. The interest must be genuinely paid. The lender then reports it as income. Many financial planners recommend the borrowing spouse set up an automatic annual transfer to the lending spouse on January 15 as a buffer before the January 30 deadline.
| Feature | Prescribed Rate Loan | Spousal RRSP |
|---|---|---|
| Account type | Non-registered | Registered (RRSP) |
| Tax on contributions | After-tax dollars | Pre-tax (deduction for contributor) |
| RRSP contribution room needed? | No | Yes (uses contributor's room) |
| Age restriction | None | Contributor must be under 72 |
| Attribution lock-in | January 30 interest must be paid | 3-year attribution rule on withdrawals |
| Available before retirement? | Yes — income splits immediately | Only on withdrawal (3-year rule) |
| Best for | Large non-registered portfolios | Equalizing RRSP balances for retirement |
These strategies aren't mutually exclusive. Many Canadian couples use a spousal RRSP to equalize registered assets for retirement while simultaneously using a prescribed rate loan to split investment income in their non-registered account during their working years.
The prescribed rate loan is not for everyone. Skip this strategy if:
Summary: A prescribed rate loan is a CRA-sanctioned way for the higher-income spouse to lend money to the lower-income spouse for investment, permanently splitting future returns. The current 3% rate in Q1 2026 makes it a reasonable window to establish new loans. The annual January 30 interest payment is non-negotiable — one missed payment ends the arrangement. Get professional guidance before setting one up.
Prescribed rate loans work best when set up correctly. A fee-only financial planner can confirm whether this strategy makes sense for your household and help you implement it properly.
All Income Splitting Strategies Spousal RRSP GuideBestMutualFunds.ca provides general financial education for Canadian investors. Nothing on this site constitutes personalized tax or investment advice. Prescribed rate loan strategies involve legal requirements under the Income Tax Act — errors can result in full attribution of investment income. Consult a qualified tax professional or fee-only financial planner before implementing this strategy. Tax rules, prescribed rates, and CRA guidance are subject to change. All worked examples are for illustrative purposes only.