Spousal Loan — Prescribed-Rate Spousal Loan
Last updated April 24, 2026 · By Evermore Private Wealth · Tax Strategy
Spousal Loan — Prescribed-Rate Spousal Loan. A prescribed-rate spousal loan is a Canadian income-splitting strategy where a higher-income spouse lends money to a lower-income spouse at the CRA's prescribed interest rate. The borrowing spouse invests the funds, paying back interest annually, and earns investment income at their lower marginal rate — legally splitting investment income that would otherwise be attributed back under the Income Tax Act's spousal attribution rules.
Source: Canada Revenue Agency, Prescribed Interest Rates
Source: Income Tax Act, s. 74.5(2)
Source: ITA, s. 74.5(2)
How the spousal loan works
Without a loan, if a high-income spouse simply gives money to a low-income spouse to invest, the Income Tax Act attribution rules (s. 74.1) tax all investment income back to the gifting spouse — defeating the income split. A formal loan documented in writing, charging at least the CRA's prescribed rate, breaks the attribution.
The borrowing spouse invests the loan proceeds, earns dividends and capital gains at their lower marginal rate, and pays interest to the lending spouse by January 30 of each subsequent year. The lending spouse reports the interest income; the borrowing spouse deducts it. The net family tax bill goes down because the investment income is split.
Why the prescribed rate matters
The CRA's prescribed rate is set quarterly based on the average yield on three-month Government of Canada T-bills. Critically, once you set the loan up at the rate in effect that quarter, the rate is locked in for the life of the loan — even if the prescribed rate later rises. In Q3 2020, the rate hit a historic low of 1%, and many high-net-worth Canadians established multi-million-dollar loans at that rate that remain in effect today. As of Q2 2025 the rate is 5%.
What this means for HNW Canadian families
We frequently see professional couples in their 50s with one spouse earning $400k+ and the other $80k or less. For these families, a $1M spousal loan can shift $50–$70k of annual investment income into the lower spouse's hands, saving $15–$25k of tax per year — every year, indefinitely. The strategy works best when the prescribed rate is low, but it remains valuable at any rate if the rate spread between spouses is large and the loan is long-lived. Document carefully — promissory note, formal loan agreement, evidence of the actual money transfer, and records of interest payments by January 30 each year. Sloppiness here gets the entire structure unwound by CRA.
Worked example — $1M spousal loan
An Ontario couple: Spouse A earns $500k (53.53% marginal), Spouse B earns $40k (20.05% marginal). Spouse A lends $1M to Spouse B at the prescribed rate of 5%. Spouse B invests the $1M and earns 7%, or $70k per year. Spouse B pays $50k of interest to Spouse A.
- Spouse B's net taxable investment income: $70k − $50k = $20k, taxed at ~20%, costing $4k.
- Spouse A reports $50k of interest income, taxed at 53.53%, costing $26.8k.
- Total family tax: $30.8k.
If instead Spouse A had earned the full $70k of investment income directly, tax would be 53.53% × $70k = $37.5k. The spousal loan saves $6.7k per year — every year — for as long as the loan exists.
Common Questions
What is the current CRA prescribed rate?
As of Q2 2025, the CRA's prescribed interest rate for spousal and family loans is 5%. The rate is reviewed quarterly and posted on the CRA website. Once a spousal loan is established at a given rate, that rate is locked in for the life of the loan even if the prescribed rate later rises.
Do I have to pay the loan interest by a specific deadline?
Yes. The borrowing spouse must pay the interest to the lending spouse no later than January 30 of the year following the year in which the interest accrues. Missing this deadline by even one day causes attribution rules to apply for that year and every subsequent year — collapsing the strategy entirely.
Can I lend money to my adult children using the same strategy?
Yes. The prescribed rate loan also works for loans to adult children (over 18) and to family trusts of which a spouse or minor child is a beneficiary. The mechanics and deadlines are identical.
What if interest rates fall after I set up the loan?
You can collapse the existing loan and set up a new one at the lower prescribed rate — but you must repay the original loan in full before establishing the new loan, which can trigger a deemed disposition of the investments. Speak to a tax advisor about restructuring during a falling-rate environment.
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