About a month ago I had a great discussion with a blog fan about tax considerations for couples investing in Cash/Margin Accounts. The CRA directs you to allocate investment income in Cash/Margin accounts according to your contributions to those accounts.
Seems straightforward, but what if you have a joint chequing account and a joint investment account? Must you allocate according to income level? Do you use individual accounts instead to keep a clean paper trail? What about estate issues?
Disclaimer: This is broad, generalized content for information/educational purposes only. Talk to a CPA or lawyer for your unique situation.
Keeping It Together
God forbid anything unexpected happens, but we know smart people prepare for the worst and live for the best. Joint accounts are the must-have choice for anyone in a long-term relationship (those in valid relationship contracts aside).
In the worst situations, joint accounts can be legally accessed and used by either party. No wills, probate, and beneficiary concerns.
If one party dies, assets in joint accounts are not subject to any taxation on death. Under most circumstances, they are seamlessly assumed by the other account holder. This means no disposition of any assets in any accounts (except registered accounts like RRSP and TFSA).
However, with individual accounts the opposite is true. Not only can access to individual accounts belonging to a deceased person be a nightmare, the assets are deemed to be disposed of and can trigger substantial taxes on any gains. The last thing a grieving partner needs is a fight with the bank, assets locked up in probate, and a massive tax bill.
Regardless of your account structure and tax considerations, always have a legal will and powers of attorney done if you're in a relationship.
Spouses With Similar Incomes
If you're both in the same tax bracket and expect to be for the foreseeable future, I would say it is quite easy. Stick to one joint chequing with one joint Cash/Margin account and state your contributions to the investment account at 50% for each partner.
Foreign stocks and bonds can be invested in swap-products, so the only immediate concern is Canadian dividend income. For this portion, use swap ETFs if you're high income and use regular ETFs if you are lower income.
If you realize any investment income, split the income evenly between spouses to keep taxes low. As long as you consistently claim the income at 50% each, it shouldn't raise any red flags with the CRA.
If questions come, it would be easy to explain that a couple with similar incomes would contribute to investment accounts evenly. Consistency is the key!
Spouses With Different Income Levels
If one spouse earns substantially more money than the other spouse you should keep two joint chequing accounts and two joint Cash/Margin accounts. Make sure all accounts are still joint accounts because of the estate issues!
Have one joint chequing account for each spouse and ensure that the income from each spouse goes into their own account. Avoid mixing the two!
Also open two joint Cash/Margin accounts, one for each spouse. This ensure a nice, clean paper trail for the CRA! One spouse will invest in one joint Cash/Margin account, the other spouse will invest in the other joint Cash/Margin account. Due to the difference in income, the investments held in each account could be quite different for tax efficiency reasons.
Adam and Bernie are a married couple. Adam earns $150,000 while Bernie earns $25,000. All of Adam's income goes into their own joint chequing account (Chequing A). All of Bernie's income goes into their joint chequing account (Chequing B).
As the higher earner, Adam will pay all household expenses, including Bernie's income taxes from Chequing A. Then Adam will contribute evenly to a personal RRSP (for Adam's benefit) and Spousal RRSP (for Bernie's benefit). Then Adam will contribute to both their own and Bernie's TFSA accounts.
Following this Adam will invest in joint Cash/Margin account A. However, due to Adam's higher income level, Cash/Margin A should be invested in swap-products only to defer capital gains income until retirement.
Bernie's income goes into Chequing B and all of it should be used for investing. Bernie will put all of the income into Cash/Margin B. In Cash/Margin B, they will invest in a Canadian index ETF paying dividends—XIC.TO for example—because these dividends are unlikely to be taxed at Bernie's income level.
This method of using two joint accounts for each account-type will keep things easy for estate purposes, granting full and swift access to all accounts while avoiding dispositions on death.
It will also keep a neat paper trail for the CRA should any questions be raised on who contributed to which account and who owes the taxes on the investment income.
Separate joint accounts will also allow tax optimization because Bernie is investing everything, resulting in a more balanced retirement income among each spouse despite wildly different working incomes.
If you use this method, be careful never to mix things up! If Adam starts moving money to Bernie's accounts, the clean paper trail will collapse and questions can be raised. Proper planning and discipline is everything here!
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