Clients who are a party, either as a borrower or lender, to a prescribed rate loan are reminded that interest outstanding relating to the 2025 year must be paid in full by Friday, January 30, 2026.
When should a Prescribe Rate Loan be considered?
What is a Prescribed Rate Loan (PRL)?
A PRL is a formal loan bearing interest at the prescribed rate. The Canada Revenue Agency (CRA) administers and announces the prescribed rate each quarter. The prescribed rate at the time a PRL is implemented remains in effect for the duration of the loan, so long as the PRL is properly maintained.
For reference purposes, please see the Appendix for the quarterly prescribed rates for 2021 and onward.
Why is a PRL commonly used to split income or shift income and/or gains?
As individual taxpayers in Canada are subject to a progressive tax system, a common tax planning goal for many Canadian families is how to appropriately split or shift income and/or gains (income/gains) from a higher income earner family member to a lower income earner family member, without going offside of the various attribution rules found in Canada’s Income Tax Act (ITA).
Where a high-income earner reports income/gains from non-registered investments (investments), setting up a PRL to shift the investments and resulting income/gains to a lower income earner such as a spouse, a child, or a family trust should be considered.
Simply, if one family member reports $200,000 in taxable income, his or her tax liability (A) will be greater than the combined tax liabilities (B) of four family members each reporting $50,000 in taxable income.
A will be greater than B due to Canada’s federal and provincial/ territorial progressive tax rates and each family member having access to personal tax credits.
When investments generate income/gains more than the prescribed rate of the PRL, tax savings will result annually. The greater the spread between income/gains and the PRL’s prescribed rate, the greater the tax savings.
For PRL’s that were negotiated prior to the fourth quarter in 2022, it is important that 2025 interest be paid prior to January 30, 2026, to preserve the relatively low prescribed rate.
How should PRL interest be paid?
It is best practice to pay the PRL interest from a bank/investment account held in name of the borrower to a different bank/investment account held in name of the lender. The use of a joint name bank or investment accounts, particularly where both borrower and lender are included, should be avoided.
The payment and receipt of interest should be documented for CRA purposes.
Income Tax reporting considerations
A PRL borrower will report all income/gains from the investments as taxable income and PRL interest paid in the year of payment as a deduction, while the PRL lender will report the PRL interest as taxable income in the year of receipt.
Following up with your wealth advisor
Please reach out to our team if you are interested in setting up a PRL, want to renegotiate a PRL due to a lower prescribed rate being announced, or need assistance in facilitating the payment and/or receipt of a 2025 PRL interest payment.
Appendix – Prescribed Rates Q1 2020 and onward
Precision Wealth Management is an owner and partner in the Q Wealth Partnership. Portfolio Management services are provided by Q Wealth. Financial planning services are provided by Precision Wealth Management. This article is not intended to be relied upon for legal or tax advice. Please see independent legal and tax advice from a professional.
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