Interest on prescribed rate loans set to rise April 1

In a blog post last summer, we reminded our readers about the tax savings opportunities of prescribed rate loans. At the time, we cautioned that interest rate increases were on the horizon and would reduce the amount of the annual savings available to a high-income household.

Based upon the average 90-day T-bill rate for January, the Canada Revenue Agency (CRA) will be increasing the annual interest rate on prescribed rate loans to 2% (up from 1%) effective April 1st. This upcoming increase marks the first time the CRA has increased the prescribed rate since 2014.

The result of the increase is that the tax savings outlined in our earlier blog post (based on a loan of $1 million at 1%) is reduced under the new 2% rate. There is still time to take advantage of the 1% rate but the window of opportunity is closing fast – March 31st, 2018 is likely the deadline for these loans rates to be at historical lows. Providing the interest on the loan is paid within 30 days of the end of each year, the prescribed rate remains fixed at the rate in effect when the loan was originated. So act now to fix the rate at 1% and enjoy the benefits of higher tax savings as interest rates increase over time.

While not for everyone, prescribed rate loans can be effectively used to tax effectively finance a multitude of objectives – from private or secondary school education, to helping your adult children buy a home, providing elder care for aging parents, etc.

We have arranged a number of these loans for clients over the course of time so if you would like more information, feel free to get in touch.