Prescribed-Rate Spousal Loans at 3%: The Income-Splitting Steps
- CRA's fourth-quarter 2026 page sets the rate for low-interest employee and shareholder loans, and the base prescribed rate used for family loans, at 3 percent from October 1 to December 31, 2026. Overdue tax is 7 percent. Those are different rates. Do not lend at the overdue-tax rate and call it conservative.
- The rate that matters is the rate in force when the loan is made. A loan made this quarter can keep 3 percent for its life even if a later quarter is higher. A loan made in a later quarter uses that later quarter's rate. The first quarter of 2027 was not published on October 4, 2026.
- Subsection 74.5 of the Income Tax Act is the attribution exception. Interest has to be charged at not less than the prescribed rate, and it has to be paid no later than 30 days after each year-end. That date is January 30. Pay it from the borrower's own money, and keep the record.
- The lender includes the interest. The borrower may deduct it if the borrowed money was used to earn income from property. A gift is not a loan. A joint account funded by the higher earner is not a loan.
- Registered room comes first. A 3 percent loan on a small balance, after legal paperwork, often loses to a TFSA contribution the lower-income spouse could have received as a gift.
The map of couple-level tools, including the spousal RRSP and pension splitting, is income splitting for couples. This page is only the loan. A spousal RRSP is a different statute and a different three-year withdrawal rule. That page is the spousal RRSP guide. Pension splitting at 65 does not require a loan at all. It is pension income splitting.
What is the 3 percent, exactly?
CRA publishes prescribed rates every quarter. The page for the fourth calendar quarter of 2026, in effect from October 1 to December 31, lists five numbers. Overdue taxes, CPP, and EI are charged at 7 percent. Corporate overpayments are paid at 3 percent. Non-corporate overpayments are paid at 5 percent. Taxable benefits on interest-free and low-interest employee and shareholder loans use 3 percent. Corporate pertinent loans or indebtedness use 6.29 percent. Family loans use the base prescribed rate, which is the same 3 percent that sits under the employee-loan benefit. If you remember only one sentence: a spousal investment loan made in this quarter has to charge at least 3 percent.
The rate is calculated from three-month treasury bills and then rounded. You do not need to rebuild that formula. You need the page for the quarter in which the money moves. A loan signed on September 30, 2026 used the third-quarter rate. A loan signed on October 1 uses 3 percent. A loan you "meant" to make in 2026 and fund in January uses whatever the first quarter of 2027 says, and that page did not exist when this article was written.
The steps, in the order that survives a review
- Fill the registered rooms that do not need a loan. Gifts into the lower-income spouse's TFSA are allowed. A higher earner paying the household bills so the lower earner invests their own pay is allowed. Do those before you paper a promissory note. The investment location, once the account exists, is tax-efficient investing.
- Confirm the quarter's rate on canada.ca the week you sign. This article's 3 percent is the fourth quarter of 2026. It is stale the day that quarter ends.
- Write a note. Amount, date, borrower, lender, interest rate of at least the prescribed rate, when interest is due, and whether the loan is payable on demand. "We will sort it out" is not a note. Both people should have a copy. The cash should move by transfer you can show, from the lender to the borrower, not by a journal entry in a spreadsheet.
- The borrower invests in a separate non-registered account in the borrower's name. The purpose is to earn income from property. A portfolio of interest, dividends, or both is the ordinary case. A TFSA, RRSP, or FHSA is the wrong destination: the income is not taxed in the borrower's hands, so the deduction story and the attribution story both get worse. Confirm the holdings with a tax advisor if they are exotic.
- Pay the interest by January 30 of the following year, every year. The borrower pays it from their own resources. A cheque or transfer from the lender back to the lender is not interest the borrower paid. Record the date and the amount. Set the reminder in December so a holiday week cannot miss January 30.
- Report both sides. The lender includes the interest received. The borrower claims the carrying charge if the use test is met, and includes the investment income. The spread, taxed at the borrower's rate instead of the lender's, is the point. If there is no spread above 3 percent, there is no point.
The attribution exception requires the interest to be paid for every year the loan is outstanding, by the 30-day deadline. If the interest for a year is not paid on time, attribution can apply to the income for that year and for every later year. You do not get to "catch up in March and start clean." The repair is a new analysis, often a new loan, not a late e-transfer with an apology in the memo line.
I ran the numbers on a $200,000 loan at 3 percent
The assumptions are on purpose, and they are not a forecast. The loan is $200,000, made in the fourth quarter of 2026 at 3 percent. Annual interest the borrower must pay the lender is $6,000. The portfolio earns 5 percent as fully taxable interest, so $10,000 a year. The borrower's net income from the structure is $4,000. The lender, who would otherwise have earned the $10,000 personally, now earns $6,000 of interest income. Nobody's TFSA is involved. The return is an assumption used to show the tax arithmetic. A year that earns 2 percent does not produce the saving below. It produces a borrower who may struggle to pay $6,000 out of a portfolio that earned $4,000.
Tax rates come from this site's 2026 Ontario calculator: federal tax plus Ontario tax after the basic personal amount and the Ontario surtax, with nothing else. At $180,000 of other taxable income, adding $10,000 of interest costs $4,779.01 of tax in that model. Adding only the $6,000 of loan interest, at the same $180,000 base, costs $2,848.42. At $50,000 of other taxable income, adding the borrower's $4,000 costs $766.47. Household tax on the $10,000 of investment interest falls from $4,779.01 to $2,848.42 plus $766.47, which is $3,614.89. The difference is $1,164.12 a year in this illustration.
| Who reports what | Income | Other taxable income assumed | Tax on that slice in the model |
|---|---|---|---|
| No loan. Higher earner owns the portfolio | $10,000 interest | $180,000 | $4,779.01 |
| Lender, after the loan | $6,000 interest received | $180,000 | $2,848.42 |
| Borrower, after the loan | $4,000 net ($10,000 income minus $6,000 interest) | $50,000 | $766.47 |
| Household with the loan | Same $10,000 of investment interest | Split as above | $3,614.89 |
The $1,164 is not a yield. It is tax not paid, in one imagined year, in one province, with two incomes that were chosen so the brackets would not be mysterious. Change the province, the incomes, or the 5 percent assumption and the dollar moves. If the portfolio earns exactly 3 percent, the borrower has $6,000 of income and $6,000 of interest, net zero, and the lender reports $6,000. You have rebuilt the higher earner's tax on a smaller base and added a January deadline. The break-even is a return above the locked rate, large enough that the bracket gap covers the paperwork and the risk of a missed payment. Eligible dividends are taxed differently from the interest in this table. Do not paste a dividend yield into the 5 percent cell and keep the tax figures. The federal brackets are only half of a combined rate.
If a future quarter is 5 percent, a loan already outstanding at 3 percent does not reset. That is why people fund the loan in a low quarter rather than "waiting to see the investments." The option is worthless if you will not pay the interest, or if the money should have gone into unused TFSA or RRSP room. It is also worthless if the lower-income spouse will not own the account in fact. Attribution follows the money when the paperwork is decorative.
What this does not split
Canada Child Benefit and the GST/HST credit look at family net income. Moving investment income from one spouse to the other does not shrink the household total, so it does not raise those benefits. OAS recovery tax is individual. Interest the lender must report can still push the lender over the recovery threshold. Interest the borrower reports can push the borrower over it. Run both returns. A corporation that pays the lower-income spouse a dividend is not this strategy. The tax on split income is a different regime, and "add them as a shareholder" is how people walk into it. Salary versus dividend for an owner who actually works in the company is a compensation question, not a spousal loan.
Frequently asked questions
Can I lend at less than 3 percent if I am feeling fair?
You can lend at any rate the two of you like. The attribution exception requires a rate at least equal to the prescribed rate for the quarter the loan is made. Below that, the income and usually the capital gains attribute back to the lender. Fairness is not the test. The page for the quarter is the test.
What if CRA raises the rate next quarter?
A new loan uses the new quarter. An existing loan that met the test on the day it was made keeps its rate, provided the interest keeps being paid on time. The first quarter of 2027 was not available on October 4, 2026. Do not assume it stays at 3 percent.
Who has to pay the January 30 interest?
The borrower. The payment has to be real. Recycling the lender's money and calling it interest is how the file fails. If the investments have not produced enough cash, the borrower still has to pay, from savings or from other income, or the exception is at risk.
Can I lend to a family trust instead of a spouse?
The prescribed rate is also used for loans to certain trusts. A trust adds a trustee, a deed, filings, and tax-on-split-income questions that a two-person promissory note does not. This article is the spouse-to-spouse loan. A trust is a paid engagement, not a second heading.
Is the interest the lender receives eligible for a tax credit?
No. It is interest income, fully included. It is not an eligible dividend and it is not a capital gain. The borrower's deduction, if the money was used to earn income, is a carrying charge. The two sides are not a wash unless the two marginal rates are the same, in which case you did the paperwork for nothing.
Should I do this with $15,000?
Almost certainly not. On the assumptions in the table, the annual tax difference on $200,000 was about $1,164. Scale that by 15,000 divided by 200,000 and you are looking at a number that will not pay for a missed January, let alone a lawyer. Use the TFSA. The loan starts to be a candidate when registered room is full and the non-registered pool is large enough that the bracket gap is obvious at 3 percent.
Sources
- CRA: prescribed interest rates, October 1 to December 31, 2026
- CRA: prescribed interest rates index
- Justice Laws: Income Tax Act, section 74.5
Three percent is a rate. January 30 is the strategy.
The 2026 tax guide covers the rest of the return the loan sits on, $49 CAD.
Get the 2026 Tax Guide — $49 CAD
