Couples Should Choose Joint Accounts

Edited Photo. Source: Flickr - Andy Morffew

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?

Talk to a CPA or lawyer for your unique situation. This is broad generalized content only which doesn't cover all potentially complex circumstances.

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 relationship (those in valid relationship contracts aside).

In the worst situation, 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. They are generally seamlessly assumed by the other party. There is no disposition of any assets in any accounts, except for registered accounts (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 (unless using Smith Manoeuvre) and state contributions are 50/50. We already know that foreign stocks and bonds are going to be invested in swap-products, so the only immediate concern is Canadian stock 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 50/50, it shouldn't raise any red flags with the CRA. If questions come, it would be easy to explain a couple with similar incomes would contribute to investments evenly.

Spouses With Different Income Levels

If one spouse earns substantially more money than the other spouse you should keep separate, but still joint accounts. Make sure all accounts are still joint accounts because of the estate issues!

Just have two joint chequing accounts, one for spouse A and one for Spouse B. Also open two joint Cash/Margin accounts, one for each spouse. This is for a clean paper trail for the CRA only!

Let's say spouse A earns $150,000 and spouse B earns $25,000. All spouse A's income goes into their chequing account A only. All of spouse B's income goes into chequing account B only.

Spouse A will pay all household expenses, including Spouse B's taxes from chequing account A. Then they will contribute evenly to a personal RRSP and Spousal RRSP. Then they will contribute to spouse A's TFSA only.

Following this they will invest in Cash/Margin account A. However, due to their higher income level, Cash/Margin A should be invested in swap-products only to defer capital gains income until retirement.

Spouse B's income goes into chequing account B and all of it should be used for investing. First for their TFSA, then joint Cash/Margin account B. In Cash/Margin account B, they can invest in a Canadian index ETF paying dividends--XIC.TO for example--because these dividends are unlikely to be taxed at Spouse B's income level.

This method of using joint accounts will not only 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 contributions/tax liabilities.

Separate joint accounts will also allow tax optimization because Spouse B is investing everything, resulting in a more even retirement income despite wildly different working incomes.

If you use this method, be careful never to mix things up! If Spouse A starts moving money to Spouse B's accounts, the clean paper trail will collapse and questions can be raised. Proper planning and discipline is everything here!

Come back Wednesday for another post where we dive further into the Moose-style Smith Manoeuvre.

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