Can Spouse Report Majority of Rental Property Income?
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Thread: Can Spouse Report Majority of Rental Property Income?

  1. #1
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    Can Spouse Report Majority of Rental Property Income?

    Hi all,

    I'm considering purchasing a property with my spouse as co-owners. My spouse is in a lower income tax bracket so I would like the majority of rental income to be reported by her.

    My understanding is that the percentage of rental income reported must match the percentage each co-owner initially paid for the property (http://www.cra-arc.gc.ca/E/pub/tg/t4...tml#P273_23328).

    My question is can I transfer money to my spouse who would then provide the majority of the deposit for the property? For example my spouse pays 90% of the deposit and I pay 10%? Then 90% of the rental income can be reported by my spouse and we will reduce our taxes quite a bit.

    I know the CRA does not like income splitting but is there anything wrong with this approach?

    Thanks


  2. #2
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    There is everything wrong with that approach. Any funds you give your spouse results in any income generated off those funds being attributable back to you (the rental income would have to be declared by you). The best you can do is loan your spouse the funds at the CRA prescribed rate (with the appropriate written loan documentation), the interest of which she can declare as an expense, and you have to declare as income. The question is if you do that (and it is only the down payment), can your spouse afford to pay her proportionate share of the mortgage too?

    CRA takes a dim view of 'evading' taxes in such ways and the reason there is 'attribution of income' rules in the first place.

  3. #3
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    Thanks AltaRed

    Yes, after some more reading it does seem like my plan is not going to work due to attribution rules.

    I think we will go with a 50-50 split in which case I could prove to the CRA that my spouse earned her portion of the deposit.

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  5. #4
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    Could you loan her the money? Another possibility may be for you to purchase her 50% interest in your home providing of course you own your home and it is in joint names. This would have to be done at fair market value and I believe you do not have to change the registration on the title but have your lawyer prepare the appropriate documentation . Don't rely on my post as being gospel but I am aware of it being done with the blessing of the individuals lawyer and accountant. One final point, after deducting all expenses will the purchase still generate a profit? If not perhaps it would be best if it was in your name. Good luck.

  6. #5
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    Quote Originally Posted by AltaRed View Post
    There is everything wrong with that approach. Any funds you give your spouse results in any income generated off those funds being attributable back to you (the rental income would have to be declared by you). The best you can do is loan your spouse the funds at the CRA prescribed rate (with the appropriate written loan documentation), the interest of which she can declare as an expense, and you have to declare as income. The question is if you do that (and it is only the down payment), can your spouse afford to pay her proportionate share of the mortgage too?

    CRA takes a dim view of 'evading' taxes in such ways and the reason there is 'attribution of income' rules in the first place.
    AltaRed is right except for one thing. If this is rental property, and you loan your spouse the money as he suggests, correctly, then your tenants should cover the mortgage payments and expenses on the property. If this is the case, she can certainly claim the profits without issue. She would not need outside income to cover the mtg pymts. If this is needed, the property is cash flow negative and why would you buy it.
    The loan for the down pymy would have to be documented, you would claim the small amount of interest paid and your spouse would claim the int expense.
    However, most rental properties are only marginally profitable, if at all, esp in the early years so not sure how much you would save in taxes initially. Long term, capital gains may make the tax savings worthwhile, or as rents rise over time maybe so.

  7. #6
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    Quote Originally Posted by twa2w View Post
    AltaRed is right except for one thing. If this is rental property, and you loan your spouse the money as he suggests, correctly, then your tenants should cover the mortgage payments and expenses on the property. If this is the case, she can certainly claim the profits without issue. She would not need outside income to cover the mtg pymts. If this is needed, the property is cash flow negative and why would you buy it ...
    True while there are tenants ... a plan should be in place for the chance that there's a gap between tenants.


    Cheers

  8. #7
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    Its the share of ownership that counts - not simply the share of money put down to acquire it.

    So when not stipulated during the purchase process, the ownership on title is 50/50 by default. This is what you use to determine the rental income allocation on your T1.

    If you want to change the allocation, you would need to change the ownership percentage on title - example; 10% spouse, 90% yourself.

    Personally, unless you are generating a huge profit after deductions, there is no point in having this changed.

  9. #8
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    Agreed. Technically it would require a tenants-in-common title to keep disproportionate allocations clean. Since most titles are undivided interest, i.e. joint tenancy, the financing should be in the same proportion, i.e. 50/50. CRA has a right to ask for the documentation to ensure 50/50 allocation is correct on T1 returns.....as a check against 'tax evasion', i.e. inappropriate income splitting.

    CRA is known to be beefing up its investigative branch and I wouldn't be surprised to see more Tax Court cases on inappropriate income splitting. They are chasing non-residents now on in appropriate claims on 'tax benefits' and are sealing the principal residence scam with reporting of all RE sales. After all, it is only fair to the vast majority of tax filers who are likely honest taxpayers, to eliminate the cheats...and avoid risk of a cultural shift towards cheating, e.g. going down the malaise that has struck countries like Greece where tax cheating became a sport.

  10. #9
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    Quote Originally Posted by Mortgage u/w View Post
    Its the share of ownership that counts - not simply the share of money put down to acquire it.

    So when not stipulated during the purchase process, the ownership on title is 50/50 by default. This is what you use to determine the rental income allocation on your T1.

    If you want to change the allocation, you would need to change the ownership percentage on title - example; 10% spouse, 90% yourself.

    Personally, unless you are generating a huge profit after deductions, there is no point in having this changed.
    I feel this comment is incorrect. The Income Tax Act has attribution rules which require the income to be reported by the spouse who provided the means to acquire the property. For example if I gifted $100 thousand to my spouse to enable her to buy a stock, I would have to report any income from that stock even if it was registered in her name.

  11. #10
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    Quote Originally Posted by AltaRed View Post
    ... CRA is known to be beefing up its investigative branch and I wouldn't be surprised to see more Tax Court cases on inappropriate income splitting. They are chasing non-residents now on in appropriate claims on 'tax benefits' and are sealing the principal residence scam with reporting of all RE sales ...
    Apparently permanent residents can be added to the list.

    CRA is complaining that the switch from being a foreign worker employed in Canada to a permanent resident means the worker left Canada, making the TFSA contributions invalid and triggering over contribution taxes. Not sure how this is possible as the worker made the contributions while working/residing in Canada for years at a time.

    Being granted permanent residence status seems to have been the trigger for CRA's idea that the worker was out of the country when the contributions were made.


    Quote Originally Posted by AltaRed View Post
    After all, it is only fair to the vast majority of tax filers who are likely honest taxpayers, to eliminate the cheats...and avoid risk of a cultural shift towards cheating, e.g. going down the malaise that has struck countries like Greece where tax cheating became a sport.
    Agreed ...


    Cheers


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