Tax – Opportunity to Income Split

The CRA has announced that they will be decreasing the Prescribed Rate for the third quarter of 2020 from 2% to 1%, effective July 1, 2020.

Consequently, Canadian taxpayers will have an opportunity to lock-in Prescribed Rate family loans at the lowest possible level and potentially achieve significant recurring tax savings on investment income by utilizing Prescribed Rate Loan Planning.

Specifically, eligible Canadians will be able to lock-in the 1% rate if they enter into their lending arrangements between July 1, 2020 and September 30, 2020 (possibly longer depending on the future direction of interest rates).

What is Income Splitting?

Income splitting is a tax strategy which aims to transfer income from a high-income family member to a lower-income family member (including a spouse or common-law partner, children or grandchildren).  Having income taxed in a lower-income earner’s hands at their graduated rates reduces the family’s overall tax liability.

The tax laws include certain anti-avoidance rules (a.k.a., the “attribution rules”) which can make income splitting difficult in practice. However, there are exceptions, if funds are loaned, rather than gifted, from one family member to the other family member at the CRA’s Prescribed Rate in effect at the time a loan is made.

The Strategy (for Spousal and Family Loans)

Prescribed Rate Spousal Loans are simple in concept. Where there is a higher-earning spouse (including a common-law partner) in or near the top tax bracket, he/she can attribute capital to the lower-earning spouse through a loan that the lower-earning spouse must invest (documentation is required). This tax strategy could potentially yield tax savings amounting to thousands each year.

Consequently, the borrowing spouse is generally taxed (at a lower rate) on the investment income generated from the borrowed funds. By January 30th of the subsequent year, the borrower must pay back the 1% interest, an expense that is deductible for the borrowing spouse but taxable to the lending spouse. Investment earnings in excess of the Prescribed Rate will effectively be shifted and taxed in the hands of the lower-income spouse. The net effect is that the overall taxes for the family may be reduced significantly.


A wife (who is in the top tax bracket) lends her husband (who has very little income) $1,000,000 that is currently earning a 6% return. The money is loaned at 1%, or $10,000. The husband would report income of $60,000 on his return with a deduction for the interest of $10,000 leaving $50,000 of taxable income. On the flip side, the wife would report the $10,000 of interest income – versus the $60,000 reported in previous years.

Effectively, the benefit of this strategy is that it shifts $50,000 of income (or 5%) from the wife’s return to the husband’s return where it is now taxed at lower marginal rates. This tax savings can be achieved on an annual basis as long as the arrangement is properly maintained.

As can be seen by this example, entering into an income-splitting loan arrangement with your spouse can provide significant long-term tax benefits for your family, with the more money that is lent, the greater the benefit – subject to maxing out the family’s graduated rates.

It should also be noted that Prescribed Rate Loan Planning to a Discretionary Family Trust can be a very powerful planning tool to help fund family expenses – such as paying for private school, summer camp, extra-curricular activities, etc.


As the rate of a Prescribed Rate loan can be locked-in indefinitely, you may want to consider entering into an income splitting loan at the 1% rate after July 1, 2020 to take advantage of tax savings – before the Prescribed Rate eventually increases (again) in the future.


Talk to us about how we can provide Integrated Wealth Strategies to clients.

Share on linkedin
Share on facebook
Share on twitter
Share on print
Share on email

Recent Posts

The opinions contained herein are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Wellington-Altus Private Wealth. Assumptions, opinions and information constitute the author’s judgement as of the date this material and subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. All third party products and services referred to or advertised in this presentation are sold by the company or organization named. While these products or services may serve as valuable aids to the independent investor, WAPW does not specifically endorse any of these products or services. The third party products and services referred to, or advertised in this presentation, are available as a convenience to its customers only, and WAPW is not liable for any claims, losses or damages however arising out of any purchase or use of third party products or services. All insurance products and services are offered by life licensed advisors of Wellington-Altus. Wellington-Altus Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. All trademarks are the property of their respective owners.