# help! tax efficient investing for stay home mom?



## metta2006 (May 1, 2011)

Hi,

My husband is making 100K a year and I'm a stay home mom of two little kids. All our savings are in my name. He did not loan his money to me. He simply let me invest his money in my name. Is it illegal? I'm asking because I was reading something about income splitting where one spouses loans money to low income spouses to invest. Can CRA argue about the sources of the money in my investment? 

All our money is in high interest savings account but I'm trying to put some in equities. For dividend income, would it be better in his name because I have no income therefore no dividend tax credit? I compared the tax refunds from case 1(putting dividend income as his income) and case 2(putting it as my income). It turns out that he gets more back in case 1. 
My husband also seems to have more tax return if I earn interest income than earning dividend income. I was surprised.
Does it sound right? Or am I missing something?

Is it more tax advantageous to invest in stocks (for capital gains) in my name or in his name? I know that if I have income, he will loose spousal credit. Thanks so much for your help.


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## OhGreatGuru (May 24, 2009)

I was going to say there may be a problem. According to the attribution rules, earnings on investments have to be attributed proportionately to the persons who contributed the capital. The fact that the investmetn account is "in your name", with no visible income, may raise questions at CRA. Theoretically the same rule applies to joint accounts, but practically CA rarely questions joint investment accounts because CRA does not dictate how a family divides up its budget.

HOWEVER: I believe one spouse can gift another spouse any amount of money without tax cosnequences. Does this then make it "her" capital to invest? Or is this loophole not permitted by the attribution rules?


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## FrugalTrader (Oct 13, 2008)

I'm no tax pro, but my understanding is that investments are taxed in the hands of those who funded the account. In the OPs case, her husband funded the account b/c he's the sole earner in the household.

If investing under the lower income spouse is desired, look into the SPOUSAL RRSP, or even a loan from the higher income spouse. Rates are at it's lowest ever...around 1% last time I checked.


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## cannon_fodder (Apr 3, 2009)

My understanding is the same as frugal's... you would be absolutely safe to draft a loan whereby your husband loans you the amount invested at 1% so that you can then claim that the investment income will be taxed in your hands. You would have to make interest payments (I don't know if you also need to make principal payments) to him. He would declare that interest income on his tax return and you get the investment income on yours.

Again, from what I remember reading, as long as the loan terms are not modified, you can keep this 1% interest rate forever regardless of how interest rates move. If you were loaned more money then you would have to use the prevailing interest rates deemed by the CRA.

Now, why interest income seems to generate a lower tax bill for your husband rather than dividend income is beyond my experience. Perhaps it is the grossed up nature of the dividends that are taken into account before the dividend tax credit is applied.

If your investment returns (in a non-registered account, e.g. not a TFSA or RRSP) exceed the cost of borrowing @1% then you will be able to deduct the interest costs of the loan.

Because the current rate is the lowest it has ever been, it should be easy to find many articles on the internet explaining how to structure this loan so that CRA would be satisified should they come looking.


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## metta2006 (May 1, 2011)

At least half of the money is mine though as it was a gift from my parents overseas but I did not declare it. Was I supposed to? 

HOWEVER: I believe one spouse can gift another spouse any amount of money without tax cosnequences. Does this then make it "her" capital to invest? Or is this loophole not permitted by the attribution rules? 

Can anyone confirm this? 

If my total income is well below10K, is there difference in my husband's tax refund(spousal credit) between me holding bonds/GIC or Canadian dividend stocks or regular stocks? When I put in the same amount I earned as interest in eligible dividend in tax software, my husbands ends up getting less tax refund. I might have missed something or because I actually did not pay any taxes to get the dividend tax credit because I earn less than 10K.

I'm not also clear on capital gain tax. For example, if I make 500 dollars in capital gain, do I add this amount in my income or only 50% of it as my income, which will increase my husband's spousal tax credit.

Thanks!


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## MoneyGal (Apr 24, 2009)

Anyone can give a gift of money to anyone else in Canada with no tax consequences. 

However, it's what you did with the money after you received it that has tax consequences. 

Because you and your husband are not in an arm's-length relationship, gains and income from money he gifts to you and is invested in your name are attributed 100% back to him. 

Here is the official CRA bulletin if you want to check it for yourself: http://www.cra-arc.gc.ca/E/pub/tp/it511r/README.html

The only way to avoid the attribution is to set up an interspousal loan as has already been described. 

As for the spousal tax credit, any income you report on line 236 will reduce the credit dollar-for-dollar until it is eliminated when your income hits about $10,000. 

When you report a capital gain or loss on Schedule 3, you put the entire gain/loss down and it is multiplied by 50% (in most cases). 

Because you have intermingled your and your husband's money, you will need to carefully separate them and set up an actual interspousal loan for the portion that is his. At this point, you should be meeting with an accountant who can provide you with the advice and direction you need and to answer your remaining questions.


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## andrewf (Mar 1, 2010)

Money is fungible, so who is to say which dollar is used for what?


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## MoneyGal (Apr 24, 2009)

andrewf said:


> Money is fungible, so who is to say which dollar is used for what?


The taxman, that's who. While money is fungible, paper trails are still required, even if it seems like a meaningless accounting exercise.


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## metta2006 (May 1, 2011)

Actually I found out almost 90% of our savings is my money from overseas. I can prove it by my bank statements. I guess mostly his income was used to pay for living. Do I still need an accountant? I can set up a loan from now on if we save money from his income. Thanks.


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## Sustainable PF (Nov 5, 2010)

metta2006 said:


> Actually I found out almost 90% of our savings is my money from overseas. I can prove it by my bank statements. I guess mostly his income was used to pay for living. Do I still need an accountant? I can set up a loan from now on if we save money from his income. Thanks.


Get an accountant. That person can at least start to untangle this for you. If I were in this deep, I would likely hire someone who knows this stuff inside and out. Especially if the return to you is substantial.


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## joncnca (Jul 12, 2009)

i'd imagine that the gift you received from overseas is pretty substantial. plus, your husband seems to make a decent salary.

the cost of retaining an experienced accountant in your situation would seem to be a drop in the bucket, and will likely set you on a good path away from unnecessary waste in the future.


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