As of July 1, 2025, the CRA’s prescribed interest rate has dropped from 4% to 3%, its lowest level since December 2022. While that may seem like a minor adjustment, this change presents meaningful tax planning opportunities—especially for families with investment assets looking to split income, or for those funding expenses such as a child’s tuition.
Because Canada’s tax system incrementally increases rates for higher-income earners, prescribed rate loan strategies can help lower a family’s overall tax burden by shifting income to lower-taxed individuals. Whether you’ve already implemented such a strategy or are considering one for the first time, now’s a great time to revisit your options.
Here’s how prescribed rate loans work, what’s changed, and how to take advantage of the current rate while it lasts.
Prescribed rate loans and attribution
The prescribed rate is set quarterly by the CRA and is based on average 3-month Treasury Bill yields. It plays a key role in enabling certain tax planning strategies, particularly those that require charging a minimum interest rate to avoid attribution rules, so long as the interest is paid no later than 30 days after the end of each taxation year.
The income attribution rules are designed to prevent most income-splitting strategies where a taxpayer transfers property to a spouse or (grand)child primarily to generate investment income. If the transfer is not properly structured, the resulting income is generally attributed back to the transferor—negating any tax benefit.
By contrast, when the transfer is structured as a loan at the prescribed rate, and interest is paid annually and on time, the income remains taxable to the recipient. Importantly, the prescribed rate is locked in at the time the loan is made, so a lower rate (like today’s 3%) can be preserved for the life of the loan, even if rates increase in the future.
The rate climbed as high as 6% for most of 2024, reflecting broader economic conditions. The recent drop not only reverses that trend but also creates more flexibility in planning strategies where charging that minimum rate is required or where deemed income inclusions equal to the prescribed rate apply.
Tax planning strategies that benefit
A prescribed rate loan allows a higher-income individual to transfer income-generating assets to a lower-income spouse or to a family trust with minor children as beneficiaries. In exchange, the transferor takes back a loan (or preferred shares) equal to the fair market value of the assets transferred.
To ensure that investment income is not attributed back to the transferor, the following conditions must be met:
- Interest is charged at the prescribed rate in effect when the loan is made; and,
- That interest is paid by January 30 of each year for the previous taxation year
Because market returns often surpass the prescribed rate, this creates an opportunity for a net benefit. For example, if a spouse borrows at 3% and invests in a portfolio earning 6%, the 3% net gain remains with the lower-income spouse—and is taxed at their rate, not the transferor’s.
In earlier quarters, when the prescribed rate was 6%, both the spread and the planning benefit were narrower. The current lower rate makes the strategy more effective and more accessible.
What if you already have a loan at a higher prescribed rate?
If your prescribed rate loan was set up when the rate was higher than 3%, you may wonder whether you can update the loan to benefit from the new rate. Since the prescribed rate is locked in when the loan is established, the only way to take advantage of the lower rate is to:
- Fully repay the original loan—ideally using proceeds from the original investments; and,
- Enter into a new loan structured adequately at the new 3% prescribed rate
However, this approach may not always be practical. Selling investments could result in capital gains or transaction costs, and if the investments have lost value, you may not have sufficient funds to repay the loan in full.
It’s also important to note that simply adjusting the interest rate or refinancing the existing loan will not satisfy CRA requirements. Doing so could result in attribution rules applying, which would defeat the purpose of the strategy.
Who should be paying attention?
This planning window may be especially relevant for:
- High earners with family members in lower tax brackets
- Individuals with existing prescribed rate loans at 4%, 5%, or 6%
- Professionals or business owners with excess personal or corporate cash
- Families planning for future goals
The CRA will announce the Q4 2025 prescribed rate in late September—and there’s no guarantee it’ll stay at 3%. So, if you’re considering a prescribed rate loan or wondering whether restructuring an existing loan makes sense, talk to your CPA advisor now. They can walk you through the numbers, help you avoid common pitfalls, and make sure the paperwork is done right.
Article written by: Nav Pannu, CPA