The only money that was ever transferred to this account was the proceeds from the sale of our common home. We have not made any capital gains since the account was opened, but we are excited to see how we can report capital gains when the time comes to sell a stake. Can we split that up or would just one of us put this on our tax return?
A. An important concept in investing and other assets is the distinction between legal and beneficial ownership. If two people like you and your wife Paul are in an investment account, you can legally own the account as a co-tenant with the right to survive. That said, if one of you dies, the account goes straight to the survivor.
There is another type of joint ownership called a joint tenancy that is commonly used for real estate. This is the case when two or more people jointly own an asset but there is no right to survive. This is more often the case when siblings own an asset or when married or, under common law, spouses in a second marriage together own an asset. After death, the deceased’s share may be distributed based on their will rather than being given to the survivor.
Regardless of how an investment account is maintained between spouses, there may be a concept of tax called write-up. Allocation takes place when the income earned by one spouse is allocated to the other spouse and is taxable to the other spouse. Simply adding a spouse’s name to an investment account does not bypass the mapping. Future interest, dividends, capital gains and other income can be attributed to the first spouse.
There are legitimate ways to avoid an write-up. A Canada Revenue Agency (CRA) mandated spouse loan of currently 1% can be used. A trust can be set up with funds lent at the prescribed interest rate. With careful tracking, the second generation income earned – the income from initial income – can avoid mapping.
Paul, your question differentiates between dividends that you have reported in the past and capital gains that you may report in the future. The rating agency does not treat different types of investment income differently when considering the allocation between spouses. Both dividends and capital gains are subject to the allocation rules.
I would also like to point out that just because CRA accepts your previous tax returns as filed and has not or have not asked any questions, it does not mean that they are consistent with the position you took on your tax return. I’ve seen significant investment income tax returns filed by spouses at home that taxpayers have sometimes inadvertently taken in a questionable stance on the attribution of.
Many spouses have joint, unregistered investment accounts and split the income equally on their tax returns. Technically, the split should be something other than 50/50 if they didn’t contribute equally to the account. In practice, the 50/50 allocation is common.