Income-split via prescribed-rate loan.
Annual tax saving
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Your breakdown
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Splitting investment income the legal way
Canada has attribution rules that normally stop a high earner from simply gifting cash to a lower-earning spouse to have the investment income taxed in the lower bracket. A prescribed-rate loan is the sanctioned workaround. The higher earner lends money to the spouse at the CRA prescribed rate, the spouse invests it, and as long as the spouse pays the annual interest by January 30 each year, the investment returns above that interest are taxed in the spouse’s hands, not the lender’s. The magic is in the lock: the prescribed rate is fixed at the moment the loan is set up and stays there for the life of the loan, even if the CRA raises rates later.
Why the timing of the rate matters so much
Because the rate is locked at inception, the strategy is dramatically more powerful when the prescribed rate is low. During the pandemic the prescribed rate sat at just 1 percent from mid-2020 through mid-2022, and families who set up loans then locked that 1 percent in permanently. The rate has been considerably higher since, which narrows the spread between what the portfolio earns and what the borrower must pay back as interest. The whole benefit lives in that gap, so the lower your locked rate relative to your expected return, the more income you can legitimately shift.
A $500,000 loan, worked through
Take the defaults: a $500,000 loan at a 5 percent prescribed rate, invested for a 7 percent return, between spouses whose marginal tax rates differ by 20 points. The portfolio throws off $35,000. The borrowing spouse must pay $25,000 of interest back to the lender, which the lender reports as taxable income. The remaining $10,000 is the income successfully moved into the lower bracket, and taxing it 20 points cheaper saves the household $2,000 a year.
The bar below splits the $35,000 of returns into the portion clawed back as interest and the portion that actually relocates to the lower bracket, with the tax saving carved out of that second slice.
The rules that sink most attempts
Two compliance points trip families up. First, the interest for each calendar year must actually be paid by January 30 of the following year. Miss that deadline even once and the attribution rules snap back, taxing the income in the lender’s hands for that year and every year after, which destroys the strategy retroactively. Second, this must be a real loan with a written promissory note, not a casual transfer. Document the date, the amount, and the locked rate. A common mistake is forgetting that the interest the lender receives is itself taxable to the lender, so the net saving is the spread on the surplus only, never the full portfolio return.
Who this suits and a note on Quebec
This is a tool for couples with a genuine bracket gap and meaningful capital to invest, often a high-earning professional and a spouse with little or no income. It also works for loans to a family trust for minor children. Quebec residents can use the same federal mechanism, but remember Quebec administers its own income tax with its own brackets and the federal abatement, so model the combined federal and Quebec spread rather than a single number. If the spread between spouses is small, the paperwork and annual interest payment may not be worth the modest saving.
What happens to the loan if the prescribed rate falls again?
Your old loan keeps its original higher rate, which is a drag. The fix some families use is to repay the existing loan in full and set up a fresh loan at the new lower rate. Done correctly this resets the locked rate, but it has to be a true repayment and a genuinely new loan, so get advice before unwinding.
Does the borrowing spouse owe tax on the whole portfolio gain?
Yes, the spouse reports all the investment income the loan generates and then deducts the interest paid to the lender. The net effect is that the surplus above the interest is taxed at the spouse’s lower rate, which is the entire point. The lender separately reports the interest received as income.