The Canada Revenue Agency (CRA) confirmed on Monday that the prescribed interest rate will drop to 1% on July 1.

The decrease to the rate for family loans was anticipated based on a formula tied to the yield on Government of Canada three-month Treasury bills. The rate is determined quarterly.

Prescribed rate loans can be used to split investment income with a spouse, common-law partner or other family member with lower income. One partner in a higher tax bracket, for example, can loan money to the partner in a lower bracket to invest, with the dividends taxed at the lower bracket.

The decrease in the third quarter marks the first time the prescribed rate has dropped since it increased to 2% on April 1, 2018.

The CRA also announced the following reductions:

  • The rate charged on overdue taxes, Canada Pension Plan contributions and employment insurance premiums will be 5% starting July 1, down from 6% the previous quarter.
  • The interest rate to be paid on corporate taxpayer overpayments will be 1%, down from 2%.
  • The rate on non-corporate taxpayer overpayments will be 3%, down from 4% in Q2.
  • The interest rate for corporate taxpayers’ pertinent loans or indebtedness will be 4.27%, down from 5.65%.