Making the most of independent capital
Make sure that the lower-income spouse invests his or her own capital,
while the higher-income spouse’s capital is used for day-to-day living
expenses. Examples of independent capital can include just about anything
that doesn’t come from the higher-income spouse, e.g., a gift or
inheritance from a parent, or earnings from a job.
You can maximize a spouse’s independent capital in a number of ways. For
example, use the higher-income spouse’s earnings for personal expenditures
– even paying the lower-income spouse’s taxes. Likewise, if a parent of one
of the spouses is thinking of giving some money to the family, it’s better
tax planning if the gift is made to the lower-bracket spouse.
Make sure that the lower-income spouse’s earnings and other independent
capital are segmented in his or her own bank account and not commingled
with money that comes from the higher-income spouse, e.g., joint accounts
and the like. That way, there should be no question about who pays the tax
on the income. Make sure that these “pure” accounts continue to “track.”
For example, a separate “pure” brokerage account in the sole name of the
lower-income spouse should be opened for the investments.
The loan manoeuvre
The Income Tax Act also allows a spouse to pay tax on investment
income (and capital gains) if the investment is funded by a loan from you,
provided that the spouse pays you interest at the “prescribed rate,” that
is, the government’s rate that is in effect at the time the loan is made –
it’s currently 1%.
In order to qualify for this tax break, the interest on the loan for each
year must be paid no later than January 30 after the year-end. Otherwise,
the attribution rules will apply, and the profits will be taxable in your
hands, not your spouse’s. Furthermore, if you miss even one deadline, the
attribution rules will apply to the particular investment forevermore.
Note: Once you make the prescribed loan, the interest rate can be locked
in, based on the prescribed rate in effect at the time, even if interest
rates go up. This prescribed loan strategy is also available for loans to a
trust for the benefit of your minor children.
Capital gains splitting
As the attribution rules potentially apply to children (and grandchildren),
they generally state that income from an investment is taxed in the hands
of the funding parent while the child is a minor. However, the attribution
rules do not apply to kids’ capital gains. This means that if a parent
funds an investment in an account for a child (either by way of gift or
loan), the attribution rules do not apply to capital gains, even though
they do apply to interest, dividends, and the like until the year in which
the child (or grandchild) turns 18.
This important exception to the attribution rules will apply even if you do
nothing more than put some money in the child’s name to make an investment.
However, there is one complication I should mention. Many financial
institutions require investment accounts for minors to be set up in the
name of a parent, because there are legal restrictions for accounts in the
name of minors. These are called “in-trust” or “in-trust for” accounts.
A number of years ago, there had been some confusion as to whether these
accounts would thwart capital gains splitting. But in a series of Technical
Interpretations, the CRA has indicated that this should not generally be
However, larger-scale investors should still seriously consider documenting
these in-trust accounts. In fact, in many cases, it may make sense to set
up a formal trust. Remember, a separate in-trust account should be set up
for each child, and the investments in the account really belong to the
child, not you. A formal trust may make sense if you’re uncomfortable with
this. For example, if you change your mind as to which child should benefit
from the investments, a powerful financial planning weapon known as a
“discretionary family trust” can help you to hedge your bets. Note that
this is not a do-it-yourself strategy; you’ll need qualified legal counsel
for this type of planning.
Samantha Prasad, LL.B.
, is a Partner with Toronto law firm
Minden Gross LLP
, a Meritas Law Firm Worldwide affiliate, and specializes in corporate,
estate, and international tax planning. She writes frequently on tax
issues, and is the co-editor of various
Wolters Kluwer Ltd. tax publications
. Portions of this article first appeared in The TaxLetter, © 2017 by
MPL Communications Ltd. Us
ed with permission.
© 2017 by Fund Library. All rights reserved. Reproduction in whole or in
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The foregoing is for general information purposes only and is the opinion
of the writer. This information is not intended to provide specific
personalized advice including, without limitation, investment, financial,
legal, accounting or tax advice.