Exclusive: spousal loan rate will drop back to 1%, says Golombek

If you missed the deadline to get clients into income splitting loans before the prescribed rate doubled to 2% from 1% last month, you’ve lucked out.

The prescribed rate is scheduled to drop back down to 1% on January 1, 2014.

Read: CRA raises prescribed interest rate to 2%

The prescribed rate is set by the Canada Revenue Agency quarterly and is tied directly to the yield on Government of Canada 90-day Treasury Bills, albeit with a lag. The calculation is based on a formula in the Income Tax Act regulations which takes the simple average of three-month Treasury bills for the first month of the preceding quarter rounded up to the next highest whole percentage point.

To calculate the rate for the upcoming quarter (January to March 2014), we go back to the first month of the current quarter (October) and take the average of October’s T-Bill yields, which were 0.959% (October 9) and 0.9149% (October 23).

That average is 0.937%, but when rounded up to the nearest whole percentage point, we get 1% for the new prescribed rate for the upcoming quarter.

Read: Lock in family loans before rate rises

In a typical income-splitting loan strategy, a high-income spouse loans funds at the prescribed rate to their lower income spouse. The investment returns less the tax deductible interest on the spousal loan can then be taxed in the lower spouse’s hands.

The advantage of advancing a loan when the prescribed rate is low? Under the tax rules, to avoid the income being attributed back to the higher-income spouse, you need only use the prescribed rate in effect at the time the loan was originally extended. In other words, if you hold off until January 1st, and establish the loan during the first quarter of 2014 when the prescribed rate is 1%, you can use that rate for the duration of the loan, which could be unlimited if there is no fixed term and it is simply a demand loan.

Read: Spousal loan pitfalls

Prescribed rate loans can also be used to help fund minor children’s expenses, such as paying for private school and extracurricular activities, by making a prescribed rate loan to a family trust.

The rates can be found online here.

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.