My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, February 26, 2018

Prescribed Rate Loans – One Last Kick at the 1% Rate

I have discussed the use of prescribed rate loans several times over the years. In this post, I will review a couple of the best ways to use these loans. However, time is now of the essence, if you wish to implement one of these loans. The current prescribed rate of 1% will be rising to 2% effective April 1st as per this article and many people only see the rate slowly rising from here over the next few years.

The two most common ways to use a prescribed rate loan are:

1. A loan to a spouse as detailed in this blog post.

2. A loan to minor children using a family trust as detailed in this blog post.

To recap (read the actual posts for all the details), the Income Tax Act contains income attribution rules that typically reallocate income to the higher income earner when he or she tries to income split with his or her spouse or children. However, there is an exception to the above attribution rules where an individual makes a loan to a spouse or minor child and interest is charged on the loan at a rate at least equal to the CRA’s prescribed interest rate at the time the loan was made. The benefit is as follows:

Where the loan carries interest at a rate no less than the prescribed interest rate, the attribution rules will not apply. For the loan to avoid the income attribution rules, the interest owing must be paid each year within 30 days after the end of the year (i.e. January 30th).

For example, say you make a $100,000 loan to a spouse with minimal income. Your spouse will be required to pay you $1,000 in interest by January 30th of each year. However, if they use the loan proceeds to invest in marketable securities and they make a 6% return, or $6,000, your family will have tax savings of up to $2,700 ($6,000-1,000 x 53.5% the highest tax rate in Ontario).

Income splitting with minors can be problematic because minors generally cannot enter into an enforceable contract. Thus, it is suggested that where you make a prescribed loan to a minor, a family trust be utilized to navigate the enforceability issues.

Tax Changes to Private Corporations

As I have discussed on this blog multiple times, the government has implemented changes to the taxation of private corporations. In December they released the legislation in relation to the revised tax on split income rules . We are still waiting (likely in the budget this week) for the rules on earning passive investment income in a corporation.

To date, it does not appear that these rules will impact prescribed rate loans, subject to this weeks budget. However, before you consider implementing a prescribed rate loan, you need to discuss this issue with your accountant to ensure they are onside with the idea and that you clearly understand the requirements and changes in legislation.

Finally, it would be prudent, based on what we know, that the proceeds of these loans only be invested in public marketable securities and not in private corporations or related corporations.

If you are interested in maximizing a prescribed rate loan, you only have a few weeks to get this loan in place to beat the increase to 2%.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.


  1. Hi Mark
    Thank you for the article and for the reminder of this quickly approaching deadline.
    You mention at the end that "based on what we know" proceeds of such loans be invested only in public securities.
    I'm not clear on the reasoning for this and wanted to see if there was any information you could share to shed light on this comment.
    I am contemplating using such a loan to have my spouse buy shares of a private holdco that owns real estate and my accountants didn't raise a concern. We have a recent sale of shares by an arms length party that held a large percentage of shares thus a fair valuation for the private shares.
    Am I missing something as this seems a reasonable option to income split depending on how the new rules in the budget come back. The thinking on my part was that issuing shares without a s.87 rollover would have a tax consequence and this might be another way to get shares in the spouses hands that is compliant with the new provisions since capital is contributed. They would then be able to share in future gains and distributions with minimal tax consequences.

    1. Hi Anon:

      The private share concern relates to the revised Income Splitting Rules from December.

      This is complicated and you need to speak to your accountants and make sure they do not feel these rules will have any impact on your plan.

      I have read where others have some concern and suggest it may be safest to stay away from private company transactions, however, you need to speak to your accountants, I am just raising a concern and they may not feel the revised rules are applicable. I cannot advise you.

  2. Hi Mark, off topic but I have a question about the update to the passive income rules in the federal budget. My company is not entitled to the small business tax rate deduction (partner in national law firm). Can we ignore the $50k income per annum rule, or do these provisions somehow still apply to us? thanks

    1. Hi Unknown

      Based on what I read today (subject to a more detailed read), the new rules will not apply to you and me (thank god). However, there will be some changes to the RDTOH when paying dividends, but they in most cases should not be that material.

    2. Hey Mark,
      Was there any update to the income splitting changes today that I missed? The clarity and improvements on the passive income rules were welcome, but there's still a lot of uncertainty around how the income splitting rules will apply to optco/holdco setups, with or without trusts.

    3. Hi Nathan

      No, there were no updates and yes, we need clarity on how the income splitting rules will apply to optco/holdco setups, with or without trusts

  3. Thanks for the response, that's a relief!

  4. Hi mark;

    Another budget question. For people who saved a lot In the corporation, does it make sense to liquidate the capital gain (7 figures) this year before upcoming tax changes? How about lending to self at 1% so the passive income would be capped indefinitely?


    1. Hi Unknown:

      I don't provide personal tax planning advice on the blog. Speak to your accountant who knows your specific facts, as in some cases it may make sense to sell for tax, but be careful not to let the tax dog wag its tail.

      You cannot make a prescribed loan from your corp to yourself, it is just a shareholder loan subject to repayment

  5. Hi Mark,
    Thanks for all the useful and informative posts on your blog.

    You mentioned spouses and minor children. What about adult children? Do the attribution rules apply? Does the prescribed interest rate need to be charged, or can the loan be interest free?

    1. Hi Anon

      I am lazy, so here is a blurb from a RBC publication that addresses your question.

      Attribution and adult children

      The income and capital gains earned on funds transferred as a gift to an adult child is not attributed back to the parent; therefore, any outright gift will achieve family income splitting.

      When a gift is made, it is generally not revocable and consequently, the parent making the gift loses control of and access to the funds. As a parent, you may not be comfortable with that for a number of reasons.

      In order to retain access to the funds, you may want to loan funds to your adult child, instead of making a gift, as you can always recall a loan. However, when a low or no-interest loan is made to adult children and one of the main reasons for making the loan was to reduce or avoid tax by causing income from the loaned property to be included in the income of your adult child, then generally interest and dividend income, but not capital gains/losses, that is earned on the loaned funds (or substituted property) will be taxed to the parent who made the loan instead of in the hands of the adult child.
      You can avoid these rules by charging interest on the loan at the CRA prescribed rate. These rules also apply to low- or no-interest loans that you make to non-arm’s length individual where one of the main reasons for the loan is income splitting.

  6. Hi Mark - I have a substantial Bonus payment coming due at the end of April and I am considering taking advantage of the reaming few days at the 1% rate to set up a loan to my wife - does the loan need to be funded on the day the agreement is entered into or is it permitted to enter into a loan to be funded using the current 1% prescribed rate at a future date? I can always pull from an LOC to fund before the end of March but if it is permitted to delay funding until I receive the funds, I would prefer to do that? Thanks!

    1. Hi Nan

      My understanding is that the loan actually has to be made before by March 31st. I have never really looked into this issue, so I am not 100% certain, but it makes common sense or everyone would make a promise to make a loan whenever the rate was rising. But for certainty, you can get your accountant to check it or check with the CRA.