Lock in 3% today, and it's yours for the life of the loan.
A prescribed rate loan is one of the few legal ways left to split investment income with a spouse or family trust — and the rate you lock in today stays locked in even if it rises later.
Canada's income attribution rules exist specifically to stop a high earner from just handing money to a lower-earning spouse to invest. The prescribed rate loan is the mechanism the Income Tax Act itself provides as a legitimate way around that — not a loophole, an actual built-in exception.
The mechanism
The higher-earning spouse lends money to the lower-earning spouse (or to a family trust, when minor children are involved) at the CRA's published prescribed rate — currently 3%, unchanged since Q3 2025. The lower earner invests the loaned capital and pays the prescribed interest back annually, by January 30 of the following year — miss that deadline even once and the attribution rules kick back in retroactively.
The spread between what the investments actually earn and the 3% owed back is taxed in the lower earner's hands, at their own marginal rate — not attributed back to the person who made the loan.
What that's worth right now
A $500,000 loan at the current 3% prescribed rate, invested in a portfolio earning 7%, produces a 4-percentage-point spread — $20,000 a year — taxed in the lower earner's bracket instead of the higher earner's. Over a decade, assuming the spread compounds within the lower earner's own investments, that's real, cumulative income-splitting the family wouldn't otherwise have access to.
The single most valuable mechanical detail: it's locked in for life
Once a loan is made, the rate that applies for its entire duration is whatever the prescribed rate was at the moment the loan was originated — even if the CRA's rate rises in later quarters. This makes the current rate environment genuinely worth paying attention to, not just a background fact.
| Period | Prescribed rate |
|---|---|
| Jul 2020 – Jun 2022 | 1% (all-time low) |
| Q3 2022 | 2% |
| Q4 2022 | 3% |
| Q2 2023 | 5% |
| 2024 (peak) | 6% |
| Q1–Q2 2025 | 4% |
| Q3 2025 – present | 3% |
A loan made during the 1% window in 2021 is still earning that same 1% spread advantage today, years later, regardless of where rates have gone since — which is exactly why timing a new loan while the rate is low genuinely matters, not just as a snapshot but for the life of the arrangement.
The detail that specifically matters for minor children
Attribution rules normally apply differently to minors than to a spouse. For loans to a family trust with minor children as beneficiaries: income earned on the loan proceeds still needs the prescribed-rate mechanism to avoid attribution — but capital gains earned by minor children are not attributed at all, prescribed rate loan or not. A trust holding growth-oriented investments for young beneficiaries can be a genuinely efficient structure on the capital gains side specifically.
Two real traps
- The loan needs to be formalized — a real legal agreement, not a handshake, with interest genuinely paid annually by the deadline.
- Alternative Minimum Tax can reduce or eliminate the benefit when a prescribed rate loan is combined with a family trust — worth modelling before committing meaningful capital.
- The lower earner needs to actually invest the funds, not spend them — this is an investment income-splitting mechanism, not a way to fund someone's daily expenses.
Model how shifting investment income between household members actually changes your combined numbers.
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