- Canadian Bookkeeping Compliance Resource
- Tax Audits in Canada
- Prescribed Interest Rates
Canadian Prescribed Interest Rates
Shareholder Loans | Spousal Loans
By L.Kenway BComm CPB Retired
Updated October 23, 2024 | Edited July 24, 2024 | Revised June 29, 2029 | Originally Published on Bookkeeping-Essentials.com in 2011
Prescribed Rates | PLOI Rates | Loans to SH | Spousal Loans | Tip
Prescribed rates can be used on loans to family members to split income. Spousal loan interest payments are due each year by January 30 (not January 31) or attribution rules kick in. The loan becomes null and void and investment income reverts back to the lender if the interest payment is not paid on time.
Bank of Canada interest rates announcements for 2024 are January 24 (5%), March 6 (5%), April 10 (5%), June 5 (4.75%), July 24 (4.5%), September 4 (4.25%), October 23 (3.75%), December 11.
CRA interest rates are used to calculate charges on taxable benefitsHighlights Of This Post
Small businesses use quarterly prescribed interest rate to calculate the amount to charge on taxable benefits such as interest-free and low-interest rate loans for shareholders, spouses, and employees.
Corporate Taxpayer Loans Or Indebtedness Rates
Used for loans received by a non-resident corporation from a corporation resident in Canada, that is controlled by the debtor or other non-arm’s length person.
Loans to Shareholders - Employee Loans
STOP ... before you write yourself that cheque or take that cash. There are very specific rules when a corporation loans money to its shareholders who own more than 10% of the shares and their family members. YOU need to be careful that money you remove from the company is not at risk of being taxable.
Spousal loans are a form of loans to shareholder and a method of income splitting. Loaning money to your spouse at the prescribed interest rate requires interest be paid back annually by January 30 of the following year. The interest income on the loan will be taxable on the higher income spouse's tax return while the lower income spouse may receive a tax deduction.
Knowledge Tip - Due To vs Due From
Do not confuse shareholder loans you made TO the corporation as an investment in the business with loans to shareholder.
Where do you want to go?
Help getting all your ducks in a row
Quarterly Prescribed Interest Rates
Did You Know?
Did you know that the overpaid taxes rate (amounts owing from the federal government) is always 2% points more than the taxable benefits rate?
Did you know that overdue taxes rate (basically the rate for all other purposes) is 4% points more than the taxable benefits rate?
Canadian prescribed interest rates are the rates used to calculate:
- interest on amounts owed to the Canada Revenue Agency (CRA);
- the refund amount CRA pays when they owe you or your corporation;
- the amount to charge on taxable benefits such as interest-free and low-interest rate loans for shareholders, spouses, and employees.
Overdue and ovepaid taxes includes income taxes, CPP contributions, EI premiums, GST/HST, Excise tax / duties ... basically any kind of federal tax.
Prescribed interest rates are released quarterly by the CRA.
The prescribed rate is based on the average yield of Government of Canada three-month Treasury bills auctioned in the first month of the preceding quarter, rounded up to the next whole percentage according to section 4301 of the Income Tax Regulations.
| Period | Overdue Taxes | Overpaid Taxes | Taxable Benefits |
|---|---|---|---|
| Jul 1 2024 to Dec 31 2024 | 9% | 5% corporate 7% others |
5% |
| Jan 1 2024 to Jun 30 2024 | 10% | 6% corporate 8% others |
6% |
| Apr 1 2023 to Dec 31 2023 | 9% | 5% corporate 7% others |
5% |
| Jan 1 2023 to Mar 31 2023 | 8% | 4% corporate 6% others |
4% |
| Oct 1 2022 to Dec 31 2022 | 7% | 3% corporate 5% others |
3% |
| Jul 1 2022 to Sep 30 2022 | 6% | 2% corporate 4% others |
2% |
| Jul 1 2020 to Jun 30 2022 | 5% | 1% corporate 3% others |
1% |
| Apr 1 2018 to Jun 30 2020 | 6% | 2% corporate 4% others |
2% |
| Jan 1 2014 to Mar 31 2018 | 5% | 1% corporate 3% others |
1% |
| Oct 1 2013 to Dec 31 2013 | 6% | 2% corporate 4% others |
2% |
| Jul 1 2010 to Sep 30 2013 | 5% | 1% corporate 3% others |
1% |
| Apr 1 2009 to Jun 30 2010 | 5% | 3% | 1% |
| Jan 1-Mar 31 2009 | 6% | 4% | 2% |
| Jul 1-Dec 31 2008 | 7% | 5% | 3% |
| Jan 1-Jun 30 2008 | 8% | 6% | 4% |
Prescribed Interest Rates
Corporate Taxpayer Pertinent Loans or Indebtedness
Cross Border Debt Financing
Pertinent loans or indebtedness (PLOI) rates pertain to non-arm's length nonresident transactions.
| Period | Corporate Loans |
Period | Corporate Loans |
Period | Corporate Loans |
Period | Corporate Loans |
|---|---|---|---|---|---|---|---|
| Oct-Dec 2024 |
8.53% | Jul-Sep 2024 |
8.96% | Apr-Jun 2024 |
9.04% | Jan-Mar 2024 |
9.16% |
| Oct-Dec 2023 |
8.99% | Jul-Sep 2023 |
8.44% | Apr-Jun 2023 |
8.40% | Jan-Mar 2023 |
8.00% |
| Oct-Dec 2022 |
6.45% | Jul-Sep 2022 |
5.20% | Apr-Jun 2022 |
4.38% | Jan-Mar 2022 |
4.15% |
| Oct-Dec 2021 |
4.17% | Jul-Sep 2021 |
4.10% | Apr-Jun 2021 |
4.07% | Jan-Mar 2021 |
4.10% |
| Oct-Dec 2020 |
4.18% | Jul-Sep 2020 |
4.27% | Apr-Jun 2020 |
5.65% | Jan-Mar 2020 |
5.64% |
Knowledge Bureau explains that corporate taxpayer pertinent loans or indebtedness (PLOI) "can occur when a loan is received by a non-resident corporation from a corporation resident in Canada (CRIC), that is controlled by the debtor or other non-arm’s length person. It can also occur when there is an amount owing to the Canadian resident corporation from a foreign affiliate of the Canadian resident corporation that is controlled by a non-resident corporation.
Instead of being treated as deemed dividends, on which a withholding tax would be required, the Canadian resident corporation and the non-resident corporation may file an election for the debt to be a PLOI. In that case, the debt is subject to a deemed interest rule under section 17.1 of the Income Tax Act. CRA first listed prescribed interest rates for this type of debt in the fourth quarter of 2013. The deemed interest rules may be used for shareholder loans and foreign affiliate dumping rules."
Under the PLOI rules, if the loan carries an interest rate less than the rate prescribed by the CRA, CRIC must include deemed interest income in its taxable income.
The rules were changed in 2022 and apply to PLOI elections after April 11, 2022 requiring expanded disclosure information. In addition, Neal Armstrong of Tax Interpretations states, "Until about now, CRA required that separate elections be filed in respect of each amount owing to the same non-resident regardless of whether such amounts pertained to the same debt instrument. Effective for elections filed after April 11, 2022, CRA will require only one election to be made in respect of a particular legal instrument where multiple amounts are owed under its terms. "
For more information on PLOI, see CRA's Understanding Interest information. For something that is a bit easier to understand, see RSM's 2020 article titled Cross-border debt financing - an overview of Canadian tax implications.
Loans to Shareholders / Employee Loans
Caution - Talk to Your Accountant
Please use the information in this section more for talking points with your accountant ... so you have a better feel for what kind of information you are seeking. Your accountant will customize advice specifically for your situation. Think of it like this ... Having a map BEFORE you enter the forest is so much better than getting lost in the forest!
STOP ... before you write yourself that cheque or take that cash ...
The rules around shareholder loans are governed primarily by Canada's Income Tax Act (ITA). There are very specific rules when a corporation loans money to its shareholders who own more than 10% of the shares and their family members. YOU need to be careful that money you remove from the company is not at risk to be taxable. If the money is not tagged as salary or dividends, it's likely you've just given yourself a shareholder loan which is a taxable benefit.
If you and other family members own less than 10% of the corporation, your transactions are treated the same as if you were an employee.
General Taxability Rule: Generally, when a loan is made by the corporation to a shareholder, a taxable benefit arises for the shareholder. The amount received must be included in the recipient's income in the year the money was received. When the loan is repaid, it can be deducted from income in the year of payment. Avoid missing the repayment terms as there are unwanted tax consequences.
However, there are exceptions to this rule*.
1. The One Year Rule: If the loan is repaid within the year following the corporation's year end, then the loan does not have to be included in income. The loan cannot be a series of small borrowings and repayments for this rule to apply. And no, you can't repay the money at yearend and borrow it again shortly after. This would be viewed as a series of loans. The Tax Guy - Dean Haley CPA refers to this as the one year rule.
For example, let's say your corporation has a December 31 year-end, and you as a shareholder borrowed $15,000 in 2021 from the corporation. No taxable benefit will occur if you repay the loan by December 31, 2022.
2. The Lenders Rule: If the loan was related to normal business activity, it is not considered a shareholder loan provided there are actual repayment terms in place where interest is charged at standard rates. The terms must be met and maintained. The Tax Guy refers to this as the lenders rule.
There must be a written agreement between the shareholder and the corporation. The agreement should state the amount of the loan and the time frame the shareholder will repay the loan. The shareholder should make actual payments with regards the loan from their personal accounts and not payment through journal entries. This makes it clear there was a financial obligation and it was being met.
3. The Principle Residence Rule: If the shareholder is also an employee (as most small business owners are), a loan can be advanced due to employment and it will not be considered income (it is tax free). It could be to purchase a principal residence, a vehicle to be used for business purposes or new shares in the corporation. As with the lenders rule, payments must be in place for repayment and maintained. The Tax Guy refers to this as the principle residence rule.
The loan must attract a fair interest rate that any arm’s length borrower would pay for a similar loan. For example, if the corporation gives an advance to a shareholder-employee to purchase a principal residence and they are charged an interest equivalent to the prescribed rates, this would not be counted as a taxable benefit.
Employer loans to employees are usually an employee benefit. The value of any kind of benefit must be added to your employment income. See the principle residence rule for loans relating to home purchase loans, home relocation loans, investment loans and loans to buy a vehicle. The Tax Guy says "the government wants to discourage employers from substituting tax-free fringe benefits for actual cash compensation to avoid income tax."
Do not confuse a "due FROM shareholder" loan with a "due TO shareholder" loan where you made a contribution to the corporation as an investment in the business or paying for company expenses with your personal funds (not a great habit ... there are better ways!).
These rules only apply when the corporation lends the shareholder/employee money.
As these are very specific rules with regards the loan transactions, it's prudent to check in with your accountant before you write yourself that cheque. If you structure the loan agreement incorrectly ... or not at all ... the cost of the loan could be considerable. You may also want to read:
- CRA bulletin IT-421R2 Benefits to individuals, corporations and shareholders from loans or debt (Archived) --- discusses section 80.4(2) Benefits Arising by Virtue of Shareholdings; and
- CRA bulletin IT-119R4 Debts of Shareholders and Certain Persons Connected With Shareholders (Archived) are good resources --- discusses subsection 15(2) Shareholder Debt and Certain Persons Connected With Shareholders (also discusses 15(1)).
*Reference: Dean Haley CPA's article titled Shareholder Loans and Your Private Corporation;
Spousal Loans Income Splitting Strategy
Caution - Talk to Your Accountant
Please use the information in this section more for talking points with your accountant ... so you have a better feel for what kind of information you are seeking. Your accountant will customize advice specifically for your situation. Think of it like this ... Having a map BEFORE you enter the forest is so much better than getting lost in the forest!
Purpose of Spousal Loans: To transfer income from the higher income spouse to the lower income spouse. Spouses need to be in different tax brackets for this strategy to work.
Here's a quick overview of how to setup a spousal loan. Notice that it's important to get professional tax and legal advice to ensure the spousal loan is setup correctly.
- Consult a Tax professional: Before designing any spousal loan, it is advisable to consult with a tax professional or financial advisor who is familiar with these types of loans. This is necessary to avoid any potential tax penalties, to understand the tax savings, the pros and cons, and to ensure the legal setup is done correctly.
- Set the Interest Rate: The CRA (Canada Revenue Agency) stipulates that the interest rate for spousal loans must be at or above their prescribed interest rates at the time the loan is extended. You can find current prescribed interest rates above. The rate in effect at the time the loan was extended remains in place for the duration of the loan. A formal spousal loan agreement with no interest charged does NOT meet the attribution rules criteria.
- Write the Loan Agreement: Write a formal demand loan agreement between you and your spouse. The framework for the agreement should include (1) the parties involved, (2) the date of the loan, (3) the loan amount, (4) interest rate, (5) payment schedule, (6) other terms such as which accounts will be used to facilitate the transfer of funds between parties or what the loan proceeds will be used for, and (7) a place for signatories and witness signing. It would be best if you have this agreement drawn up by a lawyer to ensure its legality which usually involves signatures by both parties and a witness.
- Transfer the Funds: After the loan agreement has been signed and made official, the higher income partner can transfer the funds (from the bank account agreed upon in the agreement) on the date established in the loan agreement to the lower income partner (to the account agreed upon in the loan agreement). The funds should be transferred by e-transfer between accounts, cheque, or some other traceable method. It cannot be journal entry. It must be a physical transfer of funds.
It is recommended that you have a separate bank account from your spouse to preserve the source of the investments and resulting gains / income. Mr. Greenard's article (see the end of this article) explains how he uses joint with right of survivorship (JTWROS) accounts setup specifically to execute the details of the loan agreement. - Use the Funds: The lower income spouse can then invest the money. It is important that the borrowed money is used to generate income and not for personal use or to purchase items that do not produce income. Any resulting gains or income from the investment(s) will be taxed in the lower income spouse's hands and not attributed back to the higher income spouse.
- Pay Interest: The lower income spouse must pay interest on the loan by January 30 (not January 31) of the following year, otherwise the investment income will be attributed back to the higher income spouse. This is an annual event as long as the agreement is in place. Failure to make the payment results in the loan agreement being nullified.
- Declare Interest: The higher income spouse must declare the interest as income, while the lower income spouse can declare the interest paid as a tax deduction.
Remember, these steps apply to both married and common-law partners. And spousal loans must be handled correctly to ensure tax advantages. Inadequate or incorrect setup can result in tax penalties.
The entire process should be conducted under the guidance of a tax professional or financial advisor to ensure all legal and tax implications have been considered.
The Times Colonist columnist Kevin Greenard published an excellent article on spousal loans. It's worth a read. He gives 3 top notch detailed examples of how and when you might want to enter into a spousal loan arrangement. His examples are for the following scenarios:
- One household income
- Large inheritance
- Sale of a business
OTHER IDEAS TO SIDE STEP ATTRIBUTION RULES
Tim Cestnick published an article in The Globe and Mail on June 26, 2024 about "Splitting income with your spouse can save big tax dollars if done properly". He discusses in addition to a spousal loan, transferring money for a business, lending second-generation income, giving capital dividends to your spouse, paying household expenses, swapping assets with your spouse, paying your spouse a salary.
This is advanced tax planning and requires an accountant's input to ensure you are on the right side of CRA's attribution rules. If any of these strategies are not implemented properly, you will have failed to achieve your goal of side stepping attribution rules (I.E., the income gets taxed in your hands not your spouse's.)
Related Pages On This Topic
Understanding Tax Audits in Canada | Amending a Tax Return
Reduce your fear of tax audits in Canada by understanding the process. It's your responsibility whether your return was prepared by a professional or not.
CRA and the Underground Economy | Cash Under The Table
Dealing in cash thrives in the underground economy. Here's what to do when your customer wants to do "cash under the table". Legal tax planning tools are dis...
