The Canada Revenue Agency confirmed this week that the prescribed rate on loans between family members will hold at 3 percent for the third quarter of 2026, covering July through September. It is the fifth consecutive quarter at that level, a run that started in mid 2025 after the rate fell from a high of 6 percent in early 2024.
That stability looks unremarkable next to a year that has seen the Strait of Hormuz disrupted, a new Fed chair take his first hawkish stance, and Canada's annual inflation rate climb to 3.2 percent in May. But the prescribed rate's flatness against a backdrop of rising borrowing costs elsewhere is exactly what makes this quarter's confirmation worth a planning conversation, not a routine update.
What the Rate Actually Locks In
A prescribed rate loan lets a higher income spouse, common law partner, or family member lend money to a lower income family member or family trust at the CRA's prescribed rate. The borrower invests the funds, the investment income is taxed in their hands at their lower marginal rate, and the borrower pays the lender the prescribed rate of interest annually by January 30 of the following year.
The rate is set quarterly using the average yield on 90 day Government of Canada Treasury bills from the first month of the preceding quarter, rounded up to the next whole percentage point. Once a loan is established at the rate in effect at the time, that rate is locked for the duration of the loan. A loan set up this quarter at 3 percent stays at 3 percent even if the prescribed rate climbs to 4 or 5 percent in 2027.
The strategy works when the investment return the borrower earns exceeds the prescribed rate plus the tax cost of the interest the lender reports as income. The lower the locked in rate, the lower the bar the investment has to clear, and the longer that gap persists, the more the cumulative tax saving compounds.
Why the Gap Matters More This Quarter
The Government of Canada 5 year bond yield, the rate that anchors fixed mortgage pricing and reflects where markets expect short term rates to sit, has been anything but flat. It rose to 3.20 percent in early June as renewed Hormuz related supply concern and a hot Canadian employment report pushed out expectations for Bank of Canada cuts. It has since eased back toward 3.0 to 3.05 percent as the oil risk premium unwound following the US Iran peace roadmap.
The Bank of Canada has held its policy rate at 2.25 percent through this entire stretch, most recently citing elevated uncertainty tied to the Middle East conflict and US tariff proposals while reiterating it will not let high energy prices become persistent inflation. The Federal Reserve, under new Chair Kevin Warsh, moved further: its June dot plot showed a majority of FOMC participants now project at least one rate hike before year end, a reversal from the cuts the committee had projected as recently as March.
None of that has touched the CRA's 3 percent. The Treasury bill average that sets the prescribed rate has stayed low enough to keep rounding to 3 even as longer term yields moved with the inflation and Fed repricing story. For a client locking in a prescribed rate loan today, that is a quietly widening spread between what they pay the CRA's formula and what a diversified portfolio can reasonably be expected to return over the loan's life.
The Account Types Where This Actually Applies
This is not a strategy for registered accounts. RRSP and TFSA assets cannot be the subject of a prescribed rate loan, since the attribution rules the strategy is designed around apply to non registered investment income. The clients for whom this matters hold meaningful non registered assets, typically a higher earning spouse with a lower earning partner, or a family with adult children or a family trust positioned to receive income at a lower bracket.
Incorporated business owners face a parallel version of the same math through corporate owned investments. A CCPC with retained earnings invested inside the corporation can lend to a shareholder's spouse or a family trust at the prescribed rate, splitting future investment income away from the corporation's passive income calculation, which affects the small business deduction limit once passive income exceeds 50,000 dollars annually. The corporate lending side of this is more technical and benefits from a trust structure reviewed by a tax professional before funds move.
The Planning Bridge
The deadline that matters here is not a single date. It is the quarterly reset itself. The rate in effect from July 1 is locked in for any loan documented and funded within that quarter. A client who waits until the Q4 announcement to act is betting that the rate stays at 3 percent rather than locking in certainty now.
Given that the rate is rounded up from a Treasury bill average and that bill yields tend to track the same policy expectations now pushing GoC bond yields, a rate increase is not the base case for Q4, but it is no longer the remote scenario it was during the lower rate stretch of 2025. The asymmetry favours documenting the loan now rather than waiting to see what Q4 brings.
The prescribed rate has held at 3 percent since Q3 2025 while the 5 year yield has climbed on inflation and Fed policy repricing tied to this year's Middle East disruption. GoC yield figures are period averages from Bank of Canada published data.