How Does a Prescribed Rate Spousal Loan Work?
Giving a lower-income spouse money to invest does not move the tax: attribution rules send the income straight back to you. A loan at the CRA's prescribed rate is the recognised way around that, and it works only if the interest is actually paid, every year, on time.
- The answer:: Lend capital to the lower-income spouse at the prescribed rate in force when the loan is made. Returns above that rate are taxed in their hands.
- The trap:: Missing the interest payment deadline. The loan then fails the exception and attribution applies for that year and every year after.
- The recommendation:: Set the loan up when the prescribed rate is low, document it properly, and automate the annual interest payment rather than relying on memory.
Where the AI summary above gets this wrong
"Give money to your lower-income spouse to invest and the income is taxed at their lower rate."
That's surface-true. Here's what it misses:
- Attribution sends it back — Income and gains on property transferred to a spouse are generally attributed to the transferor, so a simple gift changes nothing.
- The loan rate is fixed at inception — The prescribed rate that applies is the one in force when the loan is made, and it stays with that loan. Setting one up in a low-rate period locks the advantage in.
- The interest has to be paid — Payment must actually be made by the annual deadline. A missed payment breaks the exception permanently for that loan, not just for that year.
01 Why a gift does not work
Attribution rules exist precisely to stop income being moved to a lower-taxed spouse. Transfer property to a spouse and the income and capital gains it produces are generally attributed back to you, taxed at your rate as though nothing had happened.
A loan at the prescribed rate is the recognised exception. Because the lower-income spouse is paying a commercial rate of interest, the arrangement is treated as a genuine loan rather than a transfer, and the returns above that rate belong to them.
02 How the arithmetic works
The borrowing spouse invests the loaned capital and earns whatever return the portfolio produces. They pay you interest at the prescribed rate, deductible against their investment income, and you report that interest as your own income.
What is left — the return in excess of the prescribed rate — is taxed at their marginal rate rather than yours. The value of the arrangement is therefore the spread between the two rates applied to the excess return, which is why it suits couples with a wide gap in how their investment income is taxed.
Shows: what a given amount of additional taxable income costs you in tax at your marginal rate, and what you keep. Ignores: provincial surtaxes, credits that phase out with income, and any effect on income-tested benefits.
Source: Capital gains (line 12700)
03 The deadline that breaks it
Interest for each calendar year must be paid within 30 days of year end. Miss that deadline once and the loan permanently loses the exception, with attribution applying from then on for as long as the loan exists.
There is no partial credit and no fixing it later. That makes the annual payment the single most important administrative task in the whole arrangement, and the reason it should be automated rather than remembered.
The interest paid is also income to the lender and a deduction to the borrower, so it has to be reported on both returns. Skipping that reporting is the second way these arrangements fail a review, and it is entirely avoidable with a one-line entry on each return each year. A written note recording the amount, the date, the prescribed rate in force and the repayment terms is the document the Agency asks for, and it has to exist from the outset rather than be reconstructed.
Every failure of this arrangement I have seen was administrative rather than strategic. The structure was sound, the rate was good, and someone forgot a payment in year four. Because the consequence is permanent rather than a penalty, this is one of the few cases where I would set a calendar reminder and a standing transfer on the same afternoon the loan is signed.
FAQ
Can I just give my spouse money to invest?
You can, but it does not achieve the tax result. Attribution rules generally send the income and capital gains on transferred property back to you, taxed at your rate as though the transfer had not happened.
What rate does the loan have to charge?
The CRA prescribed rate in force at the time the loan is made. That rate stays with the loan for its life, which is why arrangements set up during low-rate periods remain valuable afterwards.
What happens if I miss the interest payment?
The loan permanently loses the exception. Interest for each year must be paid within 30 days of year end, and a single missed deadline means attribution applies from then on for as long as the loan exists.
Sources
Regulator references
- Canadian income tax rates for individuals · Canada Revenue Agency · 2025The federal and provincial rate brackets a withdrawal is taxed against.Last verified: 2026-09-07
- Capital gains (line 12700) · Canada Revenue Agency · 2025How capital gains and losses are calculated, reported and carried.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.