How joint accounts and prescribed rate loans are taxed

Many families use joint accounts for convenience, shared expenses, or investment purposes. Others turn to prescribed rate loans as a tax strategy to shift income from a higher-income individual to a lower-income family member. While both can be part of effective financial planning, the tax rules around them are very different—and understanding those differences can prevent costly attribution errors.

How Joint Accounts Are Treated for Tax Purposes

Joint accounts may have two names on the account, but the CRA does not automatically assume equal ownership. Instead, the tax treatment depends on who contributed the funds and who is entitled to the income generated by the account.

If one spouse contributes all the capital to a joint account and the other spouse receives a share of the income, attribution rules apply, and all income is taxed in the contributor’s hands. The name on the account or T5 slip is not enough to shift the tax burden.

For joint investment accounts, you must determine:

• Who contributed the money

• Whether the income reflects actual ownership

• Whether any transfers were structured legally (such as via a loan agreement)

When Joint Ownership May Create Attribution Risk

Joint accounts often create unintentional tax consequences when:

• A high-income spouse places funds in a joint account expecting to share income equally

• T5 slips are issued to both spouses, even if only one contributed funds

• A parent opens a joint account with a child for estate planning purposes, but still controls and uses the money

In these cases, CRA will often attribute the income back to the person who provided the funds. If the arrangement is not properly documented or structured, the other joint holder may not be recognized as a true owner for tax purposes.

What Is a Prescribed Rate Loan?

A prescribed rate loan is a formal income-splitting strategy that allows a high-income individual to lend funds to a lower-income spouse, child, or trust at the CRA’s prescribed interest rate. The recipient invests the funds, and any income earned (above the loan interest) is taxed in their hands—not the lender’s.

The prescribed rate is set quarterly and is historically low, making this strategy especially effective in low-interest-rate environments.

To qualify:

• A formal loan agreement must be created

• The borrower must pay interest on the loan annually by January 30 of the following year

• The interest rate must be at least the prescribed rate in effect at the time the loan is made

Why Use a Prescribed Rate Loan?

Prescribed rate loans offer one of the few legal ways to split investment income without triggering attribution rules. If structured properly, the higher-income lender avoids being taxed on the investment income, and the lower-income borrower keeps the investment return (minus interest paid).

Combining Joint Accounts and Prescribed Rate Loans

While joint accounts themselves don’t create a prescribed rate loan, they can be used to hold and invest funds once the loan is made. For example:

• A spouse lends $200,000 at the prescribed rate under a written loan agreement

• The borrowing spouse deposits the funds into a joint investment account

• The couple documents that only the borrower’s share of the income is to be reported

In this case, the joint account serves as an investment vehicle, but the underlying legal structure is what determines the income-splitting treatment.

To avoid confusion, maintain:

• A written loan agreement specifying terms and interest rate

• Proof of annual interest payments

• Records of who contributed funds and how income is to be reported