No more new 1% income-splitting loans

The 1% income-splitting loan is now a thing of the past.

On July 1, 2022, the Canada Revenue Agency prescribed interest rate increased from 1% to 2%.  A high-income spouse can still lend funds to a low-income spouse and the low-income spouse can still invest those funds and pay tax on the investment income at the low-income spouse’s lower income tax rate — but the low-income spouse will now have to pay 2% interest to the high-income spouse.  As a result, only investment earnings in excess of that 2% loan interest rate will be taxed at the lower income tax rate.

The change in the prescribed interest rate has no impact on income-splitting loans that were made back when the prescribed rate was only 1%.

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