Prescribed rate loans - Interest must be paid on the loan no later than January 30 of the following year. CRA opines that a payment by a promissory note is not sufficient.


Prescribed rate loans, also known as loans for value, are often used to permit income to be reported by lower earners without triggering the attribution rules. Such loans must bear interest at a rate no lower than the prescribed rate in place at the time the loan is made. The loan interest must be paid no later than January 30 of each following calendar year (Subsection 74.5(2)).

In an October 5, 2018 French Technical Interpretation (2018-0761551C6, Beaulieu, Melanie), CRA was asked whetherpayment of interest by issuance of a promissory note, with the cash payment being made later, would be sufficient. CRA indicated that the interest must be paid and that a promissory note would not be payment for this purpose. CRA specifically noted that it would not matter whether the promissory note bears interest.

Editors’ comment
In order for the loan for value to be effective in avoiding attribution, interest on the loan must be timely paid for the current, and all prior, years. With the prescribed rate recently rising to 2%, it is even more important to ensure interest for loans advanced under the 1% rate effective prior to April 1, 2018 is paid on time. If an interest payment is missed, the status of that loan will be lost. While that loan could be repaid, and a new loan advanced, this new loan cannot bear interest at less than the current prescribed rate, which rose to 2% on April 1, 2018, and remains at that rate until at least March 31, 2019.

Also note that, effective for 2018, T5 slips are required for interest paid by partnerships and trusts (Regulation 201(1)(b)(ii)). Interest paid by an association, corporation, institution or organization was already required to be reported on a T5 slip. This is noted in the “What’s new” section of Publication T4015, the 2018 T5 Guide – Return of Investment Income.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 450.