# Can Spouse Report Majority of Rental Property Income?



## protomok (Jul 9, 2012)

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/t4036/t4036-e.html#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


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## AltaRed (Jun 8, 2009)

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.


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## protomok (Jul 9, 2012)

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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## birdman (Feb 12, 2013)

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.


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## twa2w (Mar 5, 2016)

AltaRed said:


> 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.


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## Eclectic12 (Oct 20, 2010)

twa2w said:


> 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


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## Mortgage u/w (Feb 6, 2014)

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.


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## AltaRed (Jun 8, 2009)

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.


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## Numbersman61 (Jan 26, 2015)

Mortgage u/w said:


> 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.
> 
> ...


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.


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## Eclectic12 (Oct 20, 2010)

AltaRed said:


> ... 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.




AltaRed said:


> 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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## AltaRed (Jun 8, 2009)

I am guessing that a TFW is not classified as a resident of Canada in its strictest definition. Kind of like a student Visa with a very distinctive and narrow definition of what is permitted. Beyond my pay grade though for an educated opinion :-/


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## gardner (Feb 13, 2014)

Numbersman61 said:


> 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.


But that is simply not enough guidance to deal with many situations. What happens if my wife and I inherited the property jointly or when one of the joint owners pops his/her clogs and the ownership attribution changes? In this instance the CRA would undoubtedly accept ownership percent as the appropriate breakdown. There are numerous situations where the precise money input would be basically untraceable. In my case, for example, mortgage payments came from a joint account with my wife and it would require a monumental forensic analysis to work out which dollar came from who's income -- or from what gift from who's relatives, to whom, and went where -- over the past 25 years. The tax rule is designed to enable them to go after people on the fiddle, but they do not provide enough useful guidance to normal people just trying to stay clear of trouble.


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## Mortgage u/w (Feb 6, 2014)

Numbersman61 said:


> 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.


I think you are mixing 2 separate issues. Reporting money generated on a loan (or gift to buy stock as you mentioned) is not the same are property allocation. I can purchase a rental using solely my funds but still allocate 50% ownership to my spouse.


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## gardner (Feb 13, 2014)

Mortgage u/w said:


> I can purchase a rental using solely my funds but still allocate 50% ownership to my spouse.


But Numbersman61 is certainly right in that the rules are not written that way. That situation MIGHT look to the CRA like a fiddle where you are shifting income attribution improperly and evading taxes.
What puzzles me is how they DO handle these situations, and how fussy they might get.


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## Eclectic12 (Oct 20, 2010)

Mortgage u/w said:


> I think you are mixing 2 separate issues. Reporting money generated on a loan (or gift to buy stock as you mentioned) is not the same are property allocation. I can purchase a rental using solely my funds but still allocate 50% ownership to my spouse.


When asked this particular question about how to report the income where the husband provided the $$$, the ownership was setup as 50/50 and the wife was a stay at home mom without income, the response disagreed with with you are saying.



> Legally if ownership is 50/50, you must report the income 50/50.
> 
> However, for income tax, there is the issue of income attribution. i.e.: whose money was used to purchase the property or was it a Line of Credit with both names.
> *If your husband used his money and put the property in both your names, then technically all the rental income or losses should be reported by him.*


http://caringforclients.com/index.cfm?id=21788&modex=blogid&modexval=17028&blogid=17028


Cheers


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## Eclectic12 (Oct 20, 2010)

gardner said:


> ... That situation MIGHT look to the CRA like a fiddle where you are shifting income attribution improperly and evading taxes.
> What puzzles me is how they DO handle these situations, and how fussy they might get.


What puzzles me is the bias that the idea of "income property registered ownership alone" sets who reports the income/gains. 

For the joint investment account, as I understand it, the source of the money determines which person reports the income/gains. The rental property also produces income/gains so why would the source of the money be irrelevant?


Cheers


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## AltaRed (Jun 8, 2009)

I think there is a mixing up of situations here. It is one thing to have a principal residence with joint ownership at 50/50 and it matters not who provides the funds for it. 

It does matter a lot for an investment property. Regardless of joint ownership, declaration of rental income is attributable to who provides the funds. Look at the tax forms regarding declaration of rental income and/or cap gains on disposition. There is a box for "percentage" of 'ownership'. Remember that joint ownership (joint tenancy) is nothing other than undivided interest, i.e. it is NOT specifically 50/50 ownership. One must still allocate income according to contribution.


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## gardner (Feb 13, 2014)

AltaRed said:


> It is one thing to have a principal residence with joint ownership at 50/50 and it matters not who provides the funds for it.


But in my personal situation we have a former principle residence converted to a rental. We would have a very hard time working out, much less proving, how exactly the acquisition cost is balanced between my wife and I. The best I could argue is that it's around 50/50.

In any event, we could, at the stroke of a pen, convert it to tenants in common with specific ratio, and then the ambiguity of interest vs ownership should be resolvable. But the CRA's rules about the origin of the capital outlay would still prevail.


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## Spudd (Oct 11, 2011)

gardner said:


> But in my personal situation we have a former principle residence converted to a rental. We would have a very hard time working out, much less proving, how exactly the acquisition cost is balanced between my wife and I. The best I could argue is that it's around 50/50.


I believe in this case the correct answer is 50/50 because principal residences are regarded as common marital property, regardless of who pays for them. But I don't know for sure!


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## Eclectic12 (Oct 20, 2010)

^^^

I would think so as well ... though as the OP is buying a rental property instead of converting a primary residence, the situation is different.


Cheers


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## AltaRed (Jun 8, 2009)

Eclectic12 said:


> ^^^
> 
> I would think so as well ... though as the OP is buying a rental property instead of converting a primary residence, the situation is different.


I agree. Gardner's case is likely different than the OP's case....if only because of the ambiguity of the principal residence part....not because principal residences* are common marital property as stated by Spudd. CRA (and the ITA) don't care what provincial family law says for division of assets upon marriage/relationship breakdown. Note that the ITA has a different definition about when common law relationships kick in vs provincial family law. Also different with respect to when couples are formally separated.

* Principal residences can have different status (not common property) if subject to different provisions in a written agreement such as a pre-nup, etc. Too many people make tax mistakes when it comes to joint tenancy (undivided interest) and tenants in common tenancy (divided interest).


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