Samantha, a high-income earner, is considering making a spousal loan to her husband, who is in a lower tax bracket. To ensure the income earned on the loaned funds is taxed in her husband's hands, what is the most crucial condition for this strategy to be effective against attribution rules?

Question: Samantha, a high-income earner, is considering making a spousal loan to her husband, who is in a lower tax bracket. To ensure the income earned on the loaned funds is taxed in her husband's hands, what is the most crucial condition for this strategy to be effective against attribution rules?

Answer options:

• The loan must be formally documented with a promissory note. ✅ The interest rate charged on the loan must be at least the CRA's prescribed rate at the time the loan is made.
• Her husband must only invest the funds in Canadian-issued GICs or Treasury Bills.
• The loan must be repaid within the same calendar year it was issued.

Correct answer: The interest rate charged on the loan must be at least the CRA's prescribed rate at the time the loan is made.

Explanation: For a spousal loan to avoid attribution under the prescribed rate loan strategy, the interest charged must be at least the CRA's prescribed rate when the loan is made. This interest must also be paid annually within 30 days of year-end.