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TORONTO (CP) - A little-known income splitting technique for Canadian couples will become a little less lucrative on Oct. 1 as the prescribed loan rate increases to three per cent from its current rare low of two per cent.

"So you've got this two-week window between now and Sept. 30 to essentially get the paperwork in place and make the loan," said Adrian Mastracci, with KCM Wealth Management Inc. in Vancouver.

"That's why time is of the essence."

The prescribed loan rate is the one at which loans can be made between spouses - including common-law partners - or from a parent to an adult child. It's also the rate used to calculate taxable benefits for employees and shareholders from interest-free and low-interest loans.

The rate hit a low of two per cent in July and will rise to three per cent in October, and likely higher in the future, as a higher interest-rate environment becomes a reality.

According to Mastracci, it's an effective, safe and legal way to shift investment income from a spouse in a higher income-tax bracket to one in a lower bracket, often the stay-at-home caregiver.

Michael Goldberg, a Toronto-based tax lawyer with Minden Gross Grafstein & Greenstein, is also a fan.

"The advantage of a loan that's made at the prescribed rate when rates are low is that if you think you can do better than the prescribed rate by investing it, then you're effectively able to split income between family members," Goldberg said.

Here's how it works:

A spouse or common-law partner in higher income tax bracket lends $100,000 to spouse in a lower tax bracket. The recipient spouse invests the $100,000 at, for example, five per cent, which, Mastracci said, "isn't terribly difficult to get."

The recipient spouse pays the lending spouse two per cent interest, or $2,000, while earning $5,000 on his or her investment.

The remaining $3,000 in investment income is taxed in the hands of the recipient spouse, at a lower rate than the lending spouse would pay, meaning that more income can be kept.

"Generally speaking, if you try to give away assets to your spouse, and the spouse earns income on that, you're going to end up being taxed on that income yourself," said Goldberg, noting the difference between giving a spouse money and just lending it.

Another benefit to the prescribed rate loan is that it can remain at the same rate and remain outstanding "basically forever," Goldberg said.

"As long as that interest is paid every year, then you can keep on charging that two per cent rate even if five years from now the prescribed rates have gone up to six, eight, 10 per cent," Goldberg said.

"So the real key is that because the rates are so low and may never be this low again, this is the time to lock in because in the future you can take advantage of an increased interest rate environment and the split becomes a bigger split."

While loans between spouses are the most common use for the prescribed rate, it can also be used to calculate other loans.

For example, a parent can lend money to an adult child using the prescribed rate. But, according to Goldberg, giving the money outright may be better way to help pay for a child's university tuition or help with other expenses, as the child won't have to pay taxes on the gift, and the investment income on that money goes to the student.

The Canada Revenue Agency's prescribed rate is also used when a company makes a loan to an employee to buy a home or for other purposes.

For real estate, a willing company can lend an employee the money for a five-year mortgage at two per cent - far better than the current rate of around six per cent, Goldberg pointed out.

Other loans made by companies to employees have to be adjusted as the prescribed rate changes every quarter. If an employee gets an interest-free loan, it counts as a taxable benefit at the prescribed rate, and could change every three months.

While the window of opportunity for a prescribed-rate loan at two per cent is quickly coming to a close, some people may still want to take advantage of the loan as it slowly creeps higher.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.