Clients have until June 30 to lock in a rate of 1% on a loan to a family member as part of prescribed rate loan strategy. Beginning next month, the minimum rate that can be charged on such a loan will double to 2%.
Prescribed rate loans can be used to split investment income with a spouse, common-law partner or other family member with a lower income. Loans could be made directly to a family member or to a family trust, which can then make distributions to family members in low tax brackets, as part of a properly executed prescribed rate loan strategy.
“Clients may want to consider locking in this rate right now at 1% before Q3 starts,” said Henry Shew, managing director, tax and senior client advisor with Our Family Office Inc. in Toronto, speaking at the STEP Canada national conference on Friday.
Earlier this month, the Canada Revenue Agency (CRA) published the prescribed annual interest rates for amounts owed to or by the agency in the third quarter of 2022, which runs from July 1 to September 30.
The prescribed rate is calculated based on the average of three-month Treasury Bills for the first month of the preceding quarter, rounded up to the next highest percentage point. With interest rates on the rise, the prescribed rate will increase to 2% for the first time since the second quarter of 2020.
The CRA indicated that the interest rate it charges on overdue taxes, Canada Pension Plan contributions, and employment insurance premiums will increase to 6%, up from 5% in the second quarter.
Here are the other key changes:
- the rate to be paid on corporate taxpayer overpayments will be 2%, up from 1%;
- the rate to be paid on non-corporate taxpayer overpayments will be 4%, up from 3%;
- the rate used to calculate taxable benefits for employees and shareholders from interest‑free and low-interest loans will be 2%, up from 1%;
- the rate for corporate taxpayers’ pertinent loans or indebtedness will be 5.20%, up from 4.38%.
Access the full list of the CRA’s prescribed interest rates.