A loan or indebtedness which meets the following statutory requirements is generally referred to as a “prescribed rate loan”:
(a) interest is charged on the loan or indebtedness at a rate equal to or greater than the lesser of:
(i) the prescribed rate (set out in paragraph 4301(c) of the Income Tax Regulations) that was in effect at the time the loan was made or the indebtedness was incurred, and
(ii) the rate that would, having regard to all the circumstances, have been agreed on, at the time the loan was made or the indebtedness was incurred, between parties dealing with each other at arm’s length;
(b) the amount of interest that was payable in respect of a particular year in respect of the loan or indebtedness is paid no later than 30 days after the end of the year; and
(c) the amount of interest that was payable in respect of each taxation year preceding the particular year in respect of the loan or indebtedness was paid no later than 30 days after the end of each such taxation year.
Prescribed rate loans are designed to meet an exception to certain attribution rules under the Income Tax Act.
Pursuant to condition (b) above, interest payable on a prescribed rate loan in respect of 2022 must be paid by January 30, 2023. Failure to pay this interest by the deadline risks triggering certain attribution rules in respect of 2022 and all subsequent taxation years (pursuant to condition (c) above).
In the CRA’s view, the requirement to pay interest on a prescribed rate loan by January 30 each year is not met by the issuance of a promissory note from the debtor to the creditor, even if the note is irrevocable, unrestricted, and payable on demand (see CRA document no. 2018-0761551C6).