How does a prescribed rate loan to a family trust avoid the income attribution rules?

The Income Tax Act's attribution rules generally apply when you give or lend property to a family trust for free, or below a market rate of interest, but they carve out an exception for a loan made at the CRA's prescribed interest rate, provided the interest is actually paid to you every year, no later than 30 days after the end of the calendar year. Structured that way, income the trust earns above what it pays you in interest can be allocated out to lower-income beneficiaries, like a spouse or adult children, and taxed in their hands instead of yours.

The strategy works best when the prescribed rate in effect at the time is low, since that sets a low bar for the trust's investments to clear before the excess becomes genuine income splitting, and it locks in at the rate that applied when the loan was made — it doesn't rise later even if the prescribed rate itself increases afterward. Missing even one year's interest payment by the deadline can retroactively undo the exception for that and future years, so ongoing discipline in paying and documenting the interest matters as much as setting the loan up correctly in the first place.