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Reduced Prescribed Rate Opens Canadian Tax-Saving Opportunities
Canada's prescribed rate for loans has decreased to 3 percent as of July 1, 2025, enabling tax-saving strategies through income splitting via spousal or family trust loans, refinancing existing loans, managing shareholder loans, and employer loans.
English
Canada
EconomyOtherTax PlanningCanadian TaxPrescribed Interest RateIncome SplittingSpousal Loan
Bank Of Canada
Carolyn
- How can individuals and families utilize the reduced prescribed rate for income splitting strategies?
- Income splitting using prescribed-rate loans allows higher-income earners to shift income to lower-income family members, leveraging the lower tax brackets of the latter to reduce the overall tax liability for the family unit. This strategy is particularly effective when investment earnings exceed the 3% prescribed rate.
- What are the immediate tax implications of the prescribed rate reduction to 3 percent for Canadian taxpayers?
- The prescribed rate for loans in Canada has dropped to 3 percent, effective July 1, 2025, creating tax-saving opportunities for couples and families. This allows for income splitting strategies by lending money to lower-income spouses or family trusts at the prescribed rate, avoiding attribution rules and reducing overall tax burden.
- What are the potential future impacts of Bank of Canada policy rate changes on the effectiveness of prescribed-rate loan strategies for tax planning?
- The reduced prescribed rate presents a strategic opportunity for individuals with existing loans at higher rates to refinance and potentially save on interest payments. Looking forward, fluctuations in the Bank of Canada's policy rate will directly influence the prescribed rate, impacting the effectiveness of these income-splitting strategies.
Sustainable Development Goals
Reduced Inequality Positive
Direct Relevance
The article discusses income splitting strategies using spousal loans and loans to family trusts. By charging the prescribed rate on these loans, higher-income earners can reduce their tax burden, leading to a more equitable distribution of income and reducing the gap between higher and lower income individuals. This aligns with SDG 10, which aims to reduce income inequality within and among countries.