Interest rates are expected to inch up soon and may alter this tactic. Hence, I revisit the benefits of one of the few remaining family income splitting strategies.

It is commonly known as the “prescribed rate” loan. The idea needs two components to succeed:

  • One spouse is in a lower income tax bracket than the other, or earns little income.
  • The higher tax bracket spouse has cash to lend to the other spouse.

The key is to charge interest at least at the prescribed rate on cash loaned to a spouse/partner. That prescribed rate is now set at 1% for loans made by March 31, 2017, perhaps later.

The 1% loans don’t have to be repaid for a long time, say 5 to 10 years or more. The lower income spouse aims to accumulate a larger nest egg while the family pays less tax.

My sample case highlights the income splitting strategy (figures annualized):

  • The higher tax bracket spouse lends $100,000 to the other at the 1% prescribed rate.
  • The recipient spouse invests the cash, say at 3% ($3,000) and reports the investment income.
  • The recipient must pay 1% annual interest ($1,000) to the lender spouse.
  • The lender spouse is taxed on the 1% interest, while the recipient deducts it.
  • The recipient is taxed on the 2% net income ($3,000-$1,000).
  • This results in annual income of $2,000 shifted to the lower income spouse.
  • A promissory note is evidence for the loan.
  • A separate investment account is preferred for the recipient.
  • These loans are best made for investment reasons, like buying dividend stocks.
  • A new 1% loan can also refinance an existing higher rate prescribed loan.
  • Spouses receiving or contemplating OAS should review implications of clawback.
  • It may be sensible for the lender spouse to generate more cash for such loans.
  • Multiple prescribed loans can be made at 1% while the rate does not change.
  • Business owners can investigate the viability of prescribed loans to shareholders.

Here is a simplified method to think of such loans:

Prescribed Rate Loan – Sample Case
Cash Borrowed at 1% Rate = $100,000

Indicated Investment Income (3%) $3,000
Less: Prescribed Loan Interest (1%) $1,000
Taxable Income for Borrower Spouse $2,000
Taxable Interest for Lender Spouse $1,000


The benefit of the strategy is a higher after-tax sum for the family. Your mission is to shift taxable income into the hands of the lowest taxed spouse.

Today’s prescribed rate, which is set quarterly, is as low as it can go (next setting is soon). However, it may rise when the bank rate rises.

Check out your family benefits of this income splitting opportunity. All arrangements and documentation must be in place at least by March 31, 2017.

Follow the rules carefully when lending cash at the prescribed rate. Especially, paying the loan interest within the allotted time.

NOTE: The same 1% prescribed rate has been extended to June 30, 2017.

About Adrian Mastracci, Discretionary Portfolio Manager, B.E.E., MBA  My expertise in the investment and financial advisory profession began in 1972. I graduated with the Bachelor of Electrical Engineering from General Motors Institute in 1971. I then attended the University of British Columbia, graduating with the MBA in 1972. I have attained the “Discretionary Portfolio Manager” professional designation. I am committed to offering clients the highest standard of personal service by providing prompt, courteous and professional attention. My advice is objective, unbiased and without conflicts of interest. I’m part of a team that delivers comprehensive services and best value in managing client wealth.