The prescribed rate on loans to family members will rise to 5% in the second quarter of 2023, up from 4% in the current quarter.
On Monday, the Canada Revenue Agency (CRA) published the prescribed annual interest rates for amounts owed to or by the agency for the period from April 1 to June 30.
The CRA also indicated the interest rate it charges on overdue tax, Canada Pension Plan contributions and employment insurance premiums will increase to 9% from 8% in the second quarter.
The increase in the prescribed rate marks the fourth consecutive quarter that the prescribed rate will rise by a percentage point. The rate had been at 1% from the third quarter of 2020 until it began rising in the third quarter of 2022.
The prescribed rate is calculated based on the average of three-month Treasury Bills for the first month of the preceding quarter, rounded up to the next highest percentage point.
Prescribed rate loans can be used to split investment income with a spouse, common-law partner or other family member with a lower income spouse. Loans could be made directly to a family member or to a family trust, which can then make distributions to family members in low tax brackets, as part of a properly executed prescribed rate loan strategy. However, as the prescribed rate rises, so too must the expected investment return to make the strategy viable.
Here are other key changes:
- the rate to be paid on corporate taxpayer overpayments will be 5%, up from 4%;
- the rate to be paid on non-corporate taxpayer overpayments will be 7%, up from 6%;
- the rate used to calculate taxable benefits for employees and shareholders from interest‑free and low-interest loans will be 5%, up from 4%;
- the rate for corporate taxpayers’ pertinent loans or indebtedness will be 8.4%, up from 8.0%.
Access the full list of the CRA’s prescribed interest rates.