Reduce Your Taxes With A Prescribed Rate Loan

Reduce your families’ overall taxes owed by using a prescribed-rate loan strategy. This approach involves a person with a higher income loaning money to a spouse or relative with lower income for investment purposes. As a result, any investment income earned will be taxed at the lower income’s tax bracket instead of the higher income tax bracket.

The more income you earn, the more taxes you will pay. So, by spreading the income to family members who are taxed at lower marginal rates, you can reduce the taxes your family will pay to the CRA.

To avoid the investment income loan being taxed at the higher tax brackets, the loan must include an interest rate that is provided by the CRA. This interest rate is called the prescribed rate, and it needs to be paid back to the loaner.

When Is The Deadline To Pay Interest Rates

The deadline to pay interest on 2024 loans between spouses, trusts and related people is January 30, 2025, however If interest is not paid by this due date, then the attribution rule could apply, and the loan will no longer qualify for the tax benefits.

After making the interest payment, it is essential to gather the following supporting documentation:

  1. Proof of the actual payment of interest
  2. A calculation to support and justify the interest amount paid
  3. A T5 slip issued by the borrower for the interest paid by the due date of February 28, 2025

While the current prescribed rate is 5%, many loans established during the 1% rate period can maintain this lower rate, if interest payments are made on time.

Where To Begin

The rules around prescribed-rate loans and income attribution can be complex. We recommend speaking with a tax professional to navigate the tax savings process.

If you are a small business owner or paying high taxes, our expert team can provide tax planning services. Click here to set up an appointment.