When an individual lends money to a minor child, nephew or niece or to his or her spouse, any income from the borrowed money or from property purchased with the borrowed money is attributed back to the lender and is taxed in his or her hands.

This rule does not apply and there will be no attribution of income to the lender if interest at the “prescribed rate” in effect at the time the loan was made was charged on the loan and was paid not later than 30 days after the end of each taxation year.

The prescribed rate is based on treasury bill rates and is presently only 1%!

This means that an income splitting loan that is made now can “lock in” the 1% rate and there will be no attribution of income with respect to the loan even if interest rates increase dramatically.


Although the parents of a minor child can probably borrow money in the name of the child, there are a number of potentially serious problems with this approach.

  • If the loan exceeds $25,000, the authorization of the court must be obtained; if the authorization is not obtained the loan can be set aside by the minor.
  • If the loan is in excess of $25,000, the parents must make an inventory of the property, furnish security as a guarantee of their administration and send an annual account to the Public Curator.
  • As tutors to their minor child, the parents are limited to the “presumed sound” investments that are listed in the Civil Code.
  • The net income earned on the loan belongs to the minor and at age 18 the child will be entitled to spend the money as he or she wishes. Furthermore, it is not obvious that parents have the right to use a minor child’s income for the child’s education or other needs.
  • Since the assets belong to the child they are available to the child’s creditors.

All of these concerns can be addressed by creating a trust for the minor child and making the loan to the trust rather than to the child personally.

A well conceived and drafted trust creates a “patrimony” that is separate and distinct from the patrimony of the child but is administered by the trustees (who could be the child’s parents).

  • No Court approval is required.
  • The trustees are under no obligation to report to the Public Curator.
  • The trust deed will contain broad powers that permit the trust to make investments of all kinds.
  • The trustees can have discretion to pay all, some or none of the income and capital of the trust to the child or to use the income or capital for the child’s benefit (including the necessities of life). As long as the child has the right to receive the property of the trust unless he or she dies before reaching the age of 40, whether or not the income of the trust is actually paid to the child, all of the income of the trust will be taxed in the child’s hands and at the child’s lower marginal tax rate until the child reaches the age of 21. After the age of 21 the income of the trust must be actually paid to or used for the benefit of the child to be taxed in his or her hands.
  • Since the assets are held in trust, they are not subject to seizure by the child’s creditors.


The current prescribed rate of 1% offers the opportunity to save, annually, several thousand dollars per child through an income splitting loan. Although interest rates are likely to remain low for the next little while, there is no guarantee that the tax rules will not change. Existing loans may well be “grandfathered” and protected against changes in the tax rules.