The prescribed rate is the minimum interest rate prescribed by the Canada Revenue Agency (“CRA”) that should be charged on various non-arm’s loans such as those made by you to your spouse or child (through a family trust). Such loans are a common device to split income with others in your family. The money is often used to invest in income-producing properties and the income is taxable in the hands of the loan recipient, as long as the loan recipient faithfully pays the interest on the loan at the minimum prescribed rate on an annual basis.
In a blog I wrote about 4 years ago, I suggested that the prescribed rate was about to change, or so we believed at the time and several times since. At the risk of sounding like the proverbial shepherd boy who cried “wolf, wolf”, we believe it will happen soon.
The CRA has just announced the third quarter rates and they will not change from the second quarter. It is currently 1%. The prescribed rate is based on the T Bill rate, which is hovering at around .54% recently. Nevertheless, interest rates in general are expected to be on the rise soon (Bank of Canada rate, mortgage rates etc.) and with that we can expect a rise in 90 day Canadian Treasury Bills yield (“T Bill rate”) over the next couple of quarters. As this rate edges up beyond 1%, it is CRA’s policy to round up to the next full percentage, hence 2%.
If you set up a loan in the next few months the charge rate will be 1%. After the prescribed rate change it will be 2%. A $500,000 loan might cost $5,000 more a year.
If you are contemplating such a plan or have had a plan recently presented to you, the time to act is now, really.