Prescribed Rate Jumps to 3%: Spousal Loan Window Narrowing

Key takeaways

• The CRA prescribed interest rate rose rapidly in 2022, from 1% to 3% over the year as the Bank of Canada hiked rates
• A spousal loan established at 1% in early 2022 is locked in at 1% — but the window to act at that rate closed in Q3 2022
• Higher prescribed rates increase the cost of existing spousal loans where interest has not been paid on time
• Intra-family loans for income splitting must charge at least the prescribed rate in effect when the loan was made
• The prescribed rate also governs the interest the CRA charges on tax debts and pays on refunds

The prescribed interest rate for 2022 went from a historic low of 1% at the start of the year to 3% by the fourth quarter, following the Bank of Canada's aggressive rate-hiking cycle. For taxpayers using prescribed-rate spousal loans as an income-splitting strategy, the timing of loan establishment mattered enormously.

Historical 2022 prescribed rates

• Q1 2022 (January–March): 1%
• Q2 2022 (April–June): 1%
• Q3 2022 (July–September): 2%
• Q4 2022 (October–December): 3%

A spousal loan established in Q1 or Q2 2022 locked in the 1% rate permanently. Loans established in Q3 or Q4 2022 locked in 2% or 3% respectively. The rate in effect at the time of the loan applies for the entire term — indefinitely — as long as interest is paid annually by January 30.

Missed interest payments

If a spousal loan holder fails to pay the required interest by January 30 of the year after it accrues, the attribution rules spring back into effect for that year. The income earned on the loaned funds is attributed back to the lender (higher-income spouse), eliminating the income-splitting benefit for that year and all future years — even if interest payments resume. Missing a payment is a permanent disqualifier, not a curable error.