The prescribed rate will remain at 3% in the first quarter of 2026, and interest on overdue tax will remain at 7%, based on Government of Canada three-month Treasury Bill yields through October.
The rate that the Canada Revenue Agency (CRA) charges on overdue tax, Canada Pension Plan contributions and employment insurance premiums is set four percentage points higher than the prescribed rate. The upcoming first quarter will be the third quarter in a row in which the prescribed rate is 3%.
The prescribed rate was 4% through the first half of 2025. Before the third quarter of 2025, the prescribed rate hadn’t been as low as 3% since the final quarter of 2022. The prescribed rate began rising in the third quarter of 2022; up until then, the rate had been 1% for two years, with the rate charged on overdue tax at 5%. The prescribed rate hit 6% in the first half of 2024 before beginning to drop.
The lower the prescribed rate, the greater the potential for income splitting using a prescribed-rate loan strategy.
Prescribed-rate loans can be used to split investment income with a spouse, common-law partner or other family member. Loans could be made directly to a family member or to a family trust, which can then make distributions to family members in lower tax brackets as part of a properly executed prescribed-rate loan strategy.
As long as annual interest is paid within 30 days of year-end, the loan can remain in effect at the prescribed rate that was current when the loan was originally made. Failure to pay by the deadline will result in any investment income earned on the loan being attributed back to the lender for the year the interest was incurred — and all subsequent years.
The prescribed rate is calculated every quarter. According to section 4301 of the Income Tax Regulations, the prescribed rate is based on the average yield of Government of Canada three-month Treasury Bills auctioned in the first month of the preceding quarter, rounded up to the next whole percentage.
The auction yields for three-month T-Bills were 2.39% on Oct. 7, and 2.33% on Oct. 21. As the average of those two yields is 2.36%, the prescribed rate will be 3% for the first quarter of 2026.