Rauf Hameed Explains Prescribed Rate Loans And Income Splitting For High Income Families
I had a client last year making close to four hundred thousand dollars a year while his wife earned almost nothing, and he’d never once asked me about splitting that income. Not because he didn’t care. He just assumed it was something only ultra wealthy families with trust lawyers on retainer could actually pull off. It isn’t. It’s a strategy most CPAs barely mention because it takes paperwork most accountants don’t want to bother setting up properly.
The prescribed rate loan is the tool I reach for most often here, and if you want the fuller picture of how I structure this kind of planning you can look through Rauf Hameed directly, but the short version is this. You lend money to a lower income spouse or an adult child at the CRA prescribed rate, they invest it, and the investment income gets taxed in their hands instead of yours.
What Rauf Hameed Actually Sets Up When A Client Wants This
That last part surprises almost everyone. People assume the rate floats with the market. It doesn’t. Rauf Hameed locks these in during a low rate window whenever possible and you’ve basically frozen your advantage for as long as the loan exists.
Where People Screw This Up Without Realizing It
Miss the interest payment deadline once and the whole structure collapses under attribution rules. The income gets attributed straight back to the higher earning spouse and you’re left with all the paperwork and none of the benefit.
Documentation matters more than people want it to. A proper promissory note. Actual bank transfers, not a verbal agreement between spouses over dinner. CRA has challenged sloppy versions of this before and won, which is exactly why Rauf Hameed insists on paper trails clients sometimes find excessive at first.
Is This Actually Worth Setting Up
For a couple with a big income gap and real investable assets, usually yes. For a couple already in similar tax brackets, the juice genuinely isn’t worth the squeeze. I tell clients this constantly and some of them are a little disappointed because they came in wanting a magic bullet.
Rauf Hameed CPA runs the actual numbers before recommending this to anyone. If the projected tax savings over five years doesn’t clearly outweigh the setup and annual admin cost, I say so plainly and we look at something else instead.
Adult Children Change The Math Too
This isn’t just a spousal strategy. Lending to an adult child in a lower bracket works the same way and it’s becoming more common with clients who have a child in university or just starting out in a lower paying first job.
I’ve set this up for three separate families this year alone specifically to help fund a child’s education using investment growth taxed at a much lower marginal rate than the parent would’ve paid, and Rauf Hameed expects that number to grow as more clients hear about it through word of mouth.
Final Thoughts
Prescribed rate loans aren’t complicated once someone actually walks you through them properly, but almost nobody does because the annual maintenance is tedious and a lot of accountants would rather not chase the interest payment deadline for you every single January. I don’t mind chasing it. That’s genuinely most of the value I bring here.
If your household has a meaningful income gap and you’ve never had this conversation with your accountant, that’s worth fixing. You can read more about how Rauf Hameed approaches this kind of planning at Rauf Hameed or just book a call and we’ll run your actual numbers together.
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