# Non-registered Income Splitting



## johnnoandy (Sep 4, 2014)

Hi all...hoping to get some suggestions regarding the how best to invest non-registered investments between my spouse and myself from a taxation perspective. I've read several threads on these forums on the topic already, but none seem to match my exact situation and I find some of the recommendations to be quite confusing.

Background: We've recently maxed out all our registered investments and have no debt whatsoever, having paid off our mortgage in full a couple of years ago. I make around $200K a year, she makes around $25K a year... so there's a massive income disparity. We're relatively frugal, so we've obviously got quite a bit of cash at our disposal.

I recently had this epiphany that I'd just put all non-registered investments in her name to reduce tax, but after Googling, have come to the realization that the taxman will not be too happy with us if I was to do so. I therefore started to research ways around it, and this is where I'm stuck. I've read about being able to set-up a loan for her, charging 1%. Sounds very awkward, and I'm unclear about how this works in practice. I've heard that it makes sense to use my income for all daily expenses (which we already do) and that somehow gives us more leeway, but I'm unclear how this works, is tracked and can benefit us. Am wondering if purchasing an investment property is worth looking at as a way around it. Right now, other than the house, pretty much everything is in ETF's.

Help please!!


----------



## Eclectic12 (Oct 20, 2010)

johnnoandy said:


> ... I recently had this epiphany that I'd just put all non-registered investments in her name to reduce tax, but after Googling, have come to the realization that the taxman will not be too happy with us if I was to do so ... I've read about being able to set-up a loan for her, charging 1%. Sounds very awkward, and I'm unclear about how this works in practice ...


Not sure what is unclear about why it is an advantage. 

The attribution rules are what CRA would use to send the gains back to your tax return. The loan when setup properly is what prevents the attribution rules from being applied. Using the loan means you have a bit of extra income to report but whatever the source amount that she invests has for income/gains will be reported on her tax return.

I haven't checked but I recall a posting saying the CRA mandated rate is now something like 2%.


To use an analogy - if you drive without insurance, you have to pay for any damages. Taking out insurance/keeping it in force is awkward compared to driving without it but will mean the insurance company pays for an accident. (It is not a perfect analogy but hopefully helps.)




johnnoandy said:


> ... I've heard that it makes sense to use my income for all daily expenses (which we already do) and that somehow gives us more leeway, but I'm unclear how this works, is tracked and can benefit us ...


You paying for the expenses gives you less to invest while she has her full salary available to invest. Remember that what she makes then invests will be reported on her tax return at her income levels. 

I don't believe there is anything to track.




johnnoandy said:


> ... Am wondering if purchasing an investment property is worth looking at as a way around it.


Maybe if she takes out a loan with you guaranteeing the loan (might not pass the smell test). If you have the money though, it seems easier to go the spousal loan - whether it be for stock or property investments.


At the end of the day, your funds going in or being given to her means you have to report the gains.


Cheers


----------



## Numbersman61 (Jan 26, 2015)

johnnoandy said:


> Hi all...hoping to get some suggestions regarding the how best to invest non-registered investments between my spouse and myself from a taxation perspective. I've read several threads on these forums on the topic already, but none seem to match my exact situation and I find some of the recommendations to be quite confusing.
> 
> Background: We've recently maxed out all our registered investments and have no debt whatsoever, having paid off our mortgage in full a couple of years ago. I make around $200K a year, she makes around $25K a year... so there's a massive income disparity. We're relatively frugal, so we've obviously got quite a bit of cash at our disposal.
> 
> ...


I believe the current prescribed interest rate is 2% per annum for the first quarter of 2019. It is important to get proper financial advice and make sure you follow all the rules. If the loan is made in the first quarter of 2019, the minimum interest rate to be charged is 2%.


----------



## OnlyMyOpinion (Sep 1, 2013)

I just ensured that all of my wife's income (per each year's T1) was used first in allocating the initial investment purchases in our joint acc (and used to allocate t3, t5 slip income). Actually it worked out that our FI was hers and the equities mine. Happens to work out to be roughly 40% her and 60% me).We don't have separate accs, just a joint trading acc. You want to be able to justify that she had sufficient income for those purchases and the income coming from them. 
That plus giving her the tfsa money, and keeping rrsp accounts similar in size with spousal rrsp contributions seemed sufficient without having to do a formal loan. 

Certainly could have opened his & hers accs and made tracking a bit easier but never did.


----------



## fireseeker (Jul 24, 2017)

You say you maxxed your registered investments. Hopefully that includes a spousal RSP, which is an excellent way of moving retirement income from the higher-earning spouse to the lower-earning spouse.

The prescribed rate for family loans is indeed 2%, per the fourth bullet point here:
https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2018/interest-rates-for-the-first-calendar-quarter.html

Here is a simple explanation of how the spousal loan works (note that this was written when the prescribed rate was 1%, and note that it does not take into account capital gains, which would be taxed in the hands of the borrower):
https://business.financialpost.com/personal-finance/taxes/how-to-take-advantage-of-the-cras-1-prescribed-interest-rate-for-decades-to-come


----------



## Eclectic12 (Oct 20, 2010)

johnnoandy said:


> ... invest non-registered investments between my spouse and myself from a taxation perspective ... Right now, other than the house, pretty much everything is in ETF's ...


This is a bit of a tangent but be aware that there is some work to do in a taxable account that does not apply in registered accounts, especially for ETFs.

ETFs tend to pay a mix of income types and can change year to year. The broker will provide a T3 form (or multiple) that will break down the types. Box 42 could be decreasing the cost base (typically return of capital0 or increasing the cost base (some sort of special distribution).

The one that is the most difficult is re-invested distributions, aka phantom distributions.

The broker might be making the correct adjustments but without at least running through some calculations to spot check it - you won't know for sure.
https://www.taxtips.ca/personaltax/investing/taxtreatment/etfs.htm
https://www.adjustedcostbase.ca/blog/phantom-distributions-and-their-effect-on-adjusted-cost-base/
https://www.theglobeandmail.com/investing/education/article-taming-your-etfs-phantom-menace/


After taking the time to understand it and putting a plan in place for collecting the info/updating it, IMO it is more tedious than difficult. Another CFM-er has posted that something like five ETFs takes less than half an hour for the work. Some use a tracking site like https://www.adjustedcostbase.ca/, others intentionally keep ETFs in registered accounts only and other still have someone like an accountant run the calculations for them.


Cheers


----------



## Mookie (Feb 29, 2012)

I have been doing this for a number of years, and went through an audit from CRA unscathed, so I guess I did everything right…

The cleanest way to do this is for you and your wife’s income to be deposited into separate chequing accounts. All of your wife’s income should be used only for non-registered investing. Your income should be used for all living expenses, and any excess can be used towards both TFSAs (no attribution issues), Spousal RRSP, RESP if you have one, and the excess can then be loaned to your wife via a spousal investment loan. 

If you and your wife both have non-registered investments, then you should each have your own non-registered investment accounts. Money from your income goes to yours, and money from her income and spousal investment loans goes to hers. 

Make sure you understand and follow all the rules regarding the spousal investment loan. I believe the prescribed rate is currently 2%, but double check to make sure. Your wife also has to make annual loan payments equal to at least the total interest charged for the year. You need to report the loan interest as income on your tax return, and she can write off the interest on hers as "carrying charges".


----------



## Eclectic12 (Oct 20, 2010)

Mookie said:


> ... Your income should be used for all living expenses, and *any excess can be used towards both TFSAs (no attribution issues)* ...


Unless there has been an update since CRA's 2010 technical interpretation letter or a court challenge changing it - attribution rules can still be a problem with gifts that are contributed to TFSAs.

An exception introduced in 2009 says one can gift the funds to the spouse, the spouse can contribute the funds to their TFSA, as long as the contribution does not create or expand an over-contribution. While in the TFSA, the exception cancels the attribution rules so that all growth stays tax free/attribution free. 

Withdrawal from the TFSA of the funds, according to the bulletin, removes the exception to the attribution rules. At that point, future income/growth are attributed as usual. 

Withdraw to spend so there no added growth ... one is fine. Withdraw to re-invest ... one may run into problems.


https://www.theglobeandmail.com/glo...ough-tfsa-questions-answered/article23233954/
https://www.advisor.ca/columnists_/wilmot-george/navigate-tfsa-attribution-rules/



Cheers


----------



## Mookie (Feb 29, 2012)

Eclectic12 said:


> Unless there has been an update since CRA's 2010 technical interpretation letter or a court challenge changing it - attribution rules can still be a problem with gifts that are contributed to TFSAs.
> 
> An exception introduced in 2009 says one can gift the funds to the spouse, the spouse can contribute the funds to their TFSA, as long as the contribution does not create or expand an over-contribution. While in the TFSA, the exception cancels the attribution rules so that all growth stays tax free/attribution free.
> 
> ...


Thanks - I was not aware of this caveat. That's an interesting and sneaky way to try to shift money from one spouse to another. I can see why that shouldn't be allowed.

I was simply going by what it says on this page:
https://www.canada.ca/en/revenue-ag...s/tax-free-savings-account/contributions.html

_"You can give your spouse or common-law partner money to contribute to their own TFSA without having that amount, or any earnings from that amount being attributed back to you..."_

In my case, I've always just contributed to both our TFSAs, and have never withdrawn a cent, so no attribution issue in this case. When it comes time to withdraw, I guess I just have to be sure to use it for expenses, and not reinvest it. I can't imagine why I would want to withdraw funds from a TFSA to reinvest outside a TFSA anyway, other than for the sneaky reasons above...


----------



## OhGreatGuru (May 24, 2009)

You haven't said how much of your income you want to split. If it is less than her $25K net income, the easiest way (as others have suggested) is for her to invest up to her income, and you pay for all the household expenses. CRA doesn't interfere in how you divide the family budget.

You can, indirectly, provide the money for her TFSA contributions. There is a page from Desjardins here https://www.disnat.com/en/learning/expert-articles/patric-saint-onge/contributing-to-a-spouse-s-tfsa that explains how you should do it to have a proper paper trail. You shouldn't pay directly to her TFSA: you gift her money to her account; then she makes the TFSA contribution. 

Beyond that, you are looking at spousal loans.


----------



## peterk (May 16, 2010)

I don't think the math for spousal loan works so well anymore @ 2% loan rate. Unless you are setting unrealistic expectation on the investment returns of the borrowing spouse.


----------



## humble_pie (Jun 7, 2009)

peterk said:


> I don't think the math for spousal loan works so well anymore @ 2% loan rate. Unless you are setting unrealistic expectation on the investment returns of the borrowing spouse.



do you remember how dMoney worked up a stunningly brilliant plan for a spousal loan. He, too, was affianced to his longtime gf & planning not only his wedding, but how to transfer some wealth into her hands via a well-documented loan.

i've never even heard of any financial planner who'd ever come up with a spousal loan strategy as advanced as dMoney's. It involved options. DMoney had studied options extensively as a finance undergrad, had several years successfully trading puts & calls right under our noses in cmf forum.

ya'll remember how dMoney was a young man still in his mid-20s. His core option strategy was selling puts in high quality stocks that he, as a young person starting a cumulative investment program that would last all his life, wanted to acquire anyhow. DMoney utilized put selling as a pathway to cheaper acquisition prices.

after he'd sold his toronto house for more than $1,000,000, dMoney began looking at spousal loans as a way to split investment income.


----------



## johnnoandy (Sep 4, 2014)

Thanks everyone for the extensive feedback... much appreciated.

I've been processing everything I can, and at a high-level, it all seems very straightforward. I do have some questions though as I get into the details and logistics... I'm hoping the crowd can opine on. In some cases, there's no right or wrong, I'm just looking for opinions.

First, confirming I've already taken advantage of all registered options first, including Spousal RRSP and "gifting" my wife the money to max out her TFSA. We have no plans to withdraw the funds and re-invest them. They'd only be withdrawn prior to retirement or for emergency purposes to cover unforeseen expense.

To even it all out, let's say we have $100K to contribute after all registered is maxed out. It won't be quite that much, but near enough.

Step 1: She makes $25K a year, so we contribute the first $25K or non-registered investments in her name

Step 2: We'd be left with $75K per year, so we set-up a spousal loan at 2% for her to invest, then invest the full $75K

Again, high-level, that's straightforward enough, now I have several logistical questions as follows:

1. For Step 1 (above) do I really need to do anything more than just ensure I'm contributing as much as she earns? Her paycheque comes in at just over $600 bi-weekly. Easiest thing for me to do is just contribute that exact amount bi-weekly to her non-registered investments. Our pay goes into two different accounts, though both are joint accounts. She has a few pre-authorized bills going out of her account, which I haven't bothered switching over to mine. Obviously it would be cleanest if there were no bills coming out of hers... but I'd prefer not to switch these unless I really have to. I'm not sure it matters as long as it can be tracked though. I'd just move her money out and then move mine in to cover the bills. I'd automate all of this. A little messy, but would it be an issue from tax perspective? Similarly, is there a really an issue with them both being joint accounts (vs. individual)... I'm hoping as long as the flow of funds can be traced, we don't need to be too buttoned down from this standpoint. Could be wrong?!

2. Is the income based on her most recent tax stated income, or is it based on what she's currently making i.e., her current pay cheque? Easier if the latter. She increased hours this year, so I'd prefer to work off that, not prior years stated income.

3. It's a lot of hassle. Is it really worth it? What exactly is the math I'd need to use (making assumptions on returns) to estimate how much we stand to gain? I initially figured returns would have to be greater than 2% and our actual gains would just be whatever is above and beyond that... but I think it's actually based on whatever tax bracket I fall into. So, if my income was being taxed at 50% (I like round numbers), then we'd actually be making money as long as returns are over 1%. Have a feeling I'm missing something here. Help!

4. Having a hard time getting my head around the one comment from Eclectic12 r.e., issues with investing in non-registered ETFs. I'm with Wealthsimple and they report "Dividends received" which I assume are re-invested. I think these would be the "phantom distributions" referenced. Perhaps I'm misunderstanding though. It's an aggressive growth portfolio mix of ETFs.

5. Related to the above question, I'd read somewhere that it’s best to have most aggressive (likely higher yielding) investments in registered, and put the lower risk (lower yielding) stuff in non-registered investments. That way higher gains grow tax-sheltered. This sounds logical enough to me. Assuming I'm not missing anything there, and if challenges regarding ETF's (above) become too cumbersome, should I be thinking about laddered or index-linked GIC's for higher yields than a savings account, but much less hassle than the above, and likely lower (but predictable) gains over time?

6. High-level, what needs to be done differently come tax time to report all this appropriately? We do our own taxes.

So many questions I know... Any additional feedback would be appreciated!


----------



## Eclectic12 (Oct 20, 2010)

johnnoandy said:


> Thanks everyone for the extensive feedback... much appreciated ...


You are welcome.




johnnoandy said:


> ... 4. Having a hard time getting my head around the one comment from Eclectic12 r.e., issues with investing in non-registered ETFs. I'm with Wealthsimple and they report "Dividends received" ...


This is why I mentioned it ... it is going to be brand new set of actions in a taxable account.

What you describe from Wealthsimple is the same as I have for iShares ETF XIC *in a registered account*.

Registered accounts do not have Canadian tax on the different types of income or when selling for a capital gain - the broker reports cash paid as "dividends" only. No T3 tax form is filled out and you don't have to worry about adjusted cost base (ACB) changes for return of capital (RoC) or re-invested distributions aka phantom distributions.

Say you buy ETFs in 2019 in a taxable account then around march 2020 the broker will provide the T3 form breaking down the different types of taxable income plus document non-taxable RoC that has to adjust the ACB down. The re-invested distributions you have to find on the ETF provider's web site then increase the ACB up.

As I say, now that I hold XIC in a TFSA, I get the same as you are describing for Weathsimple. Before transferring to the TFSA, I'd have to sort out the T3 form and look for phantom distributions.

Looking at the 2017 breakdown for XIC off of the iShares web site, the taxable amount was $0.93 while eligible dividends was $0.62 and other income was $0.01 per unit. Googling "blackrock 2017 reinvested distributions" gives a PDF that says XIC had a $0.29 phantom distribution. 
https://www.blackrock.com/ca/individual/en/literature/press-release/pr-2017-12-28-en.pdf

In the TFSA, I don't need to do anything while in a taxable account, the T3 would have the taxable income by type and I would have to remember that no RoC means no reduction and a phantom distribution of $0.29 a unit means an increase to the ACB.




johnnoandy said:


> ... which I assume are re-invested. I think these would be the "phantom distributions" referenced. Perhaps I'm misunderstanding though ...


"Phantom Distributions" do not pay cash and do not result in added units. Since there is no T3 form, this is a registered account where the "dividends" are the cash that was paid. If the cash payments are re-invested, you will see additional units being added.

The good side is that there's no capital gain to pay taxes one (that is what a phantom distribution "gives" one) and no ACB adjustments to make.




johnnoandy said:


> ... 5. Related to the above question, I'd read somewhere that it’s best to have most aggressive (likely higher yielding) investments in registered, and put the lower risk (lower yielding) stuff in non-registered investments. That way higher gains grow tax-sheltered. This sounds logical enough to me. Assuming I'm not missing anything there, and if challenges regarding ETF's (above) become too cumbersome, should I be thinking about laddered or index-linked GIC's for higher yields than a savings account, but much less hassle than the above, and likely lower (but predictable) gains over time?


That's one way of approaching it. If I had crystal ball to know what was going to do well, I'd have all the big gainers in my TFSA (no Canadian tax or tax implications on withdrawals), the eligible dividends or high paying RoC in a taxable account and GICs in my RRSP (you and the gov't are sharing in the growth).

My crystal ball isn't working well so I have a mix in all three. The tweaking I have done is get RioCan that has a lot of "other income" into my TFSA, high paying RoC in the taxable account (I get to use the full $ as the tax is rolled into the sale price in the future and will be the tax preferred rate of capital gains).




johnnoandy said:


> ... 6. High-level, what needs to be done differently come tax time to report all this appropriately? We do our own taxes.


Investments in a taxable account means tracking the ACB.

Canadian ETFs mean checking for phantom distributions on the provider's web site. You could check with Weathsimple to see if they factor RoC and phantom distributions into their cost numbers. Some discount brokers handle it properly and some don't. I preferred to track it and compare as only I care about double paying capital gains taxes. :rolleyes2:


The T3 form(s) take care of the other types. If you use tax software, it is simply a matter of making sure to enter each box's numbers correctly. Or if you have a CRA My Account, you can download what CRA has received into the tax software, saving the "create form / enter numbers".


Here is a link that may help https://canadiancouchpotato.com/2014/06/27/calculating-adjusted-cost-base-a-case-study/.
Or I seem to recall some of the "Canadian ETF Investing for Dummies" books having a good chapter on what has to be reported and what the calculations are.


*Edit:*
Not sure if this will simply or confuse you but the really high level for Canadian ETFs are that there are three tax actions.

1) Taxable income paid during the year whether it be capital gains, eligible dividends, other income etc. have to be reported on one's annual tax return (from the T3 form).
2) Return of capital is not taxable but does require the cost base be reduced, increasing the future capital gains.
3) Phantom distributions are taxable as a capital gain, reported on the annual tax return (on the T3 form typically with with CG) *and* require the cost base be increased to reduce future capital gains.


Feel free to ask questions.


Cheers


*PS*
This is something that is intimidating when one is learning. After one has a system setup (or confirmed one broker is doing it properly), it is tedious but not a lot of work. Others here have posted that taking care of a six ETF portfolio for the ACB was a once a year, about half an hour bit. The T3 forms when doing one's tax return, are quick (assuming one is using tax software).


----------



## gibor365 (Apr 1, 2011)

One spouse gives loan to other spouse sounds so ridiculous . Are we talking about family?! It's like to loan your spouse . 20 years I live in Canada and cannot use to this BS!


----------



## AltaRed (Jun 8, 2009)

It is the system, for better or worse. There seems to be no social movement to push for change, so either suck it up or vote with your feet if you don't like it.

P.S. There are also many reasons to keep finances separate including tax obligations such as business complications and second relationships, so the current system isn't all bad.


----------



## peterk (May 16, 2010)

johnnoandy said:


> 1. For Step 1 (above) do I really need to do anything more than just ensure I'm contributing as much as she earns? Her paycheque comes in at just over $600 bi-weekly. Easiest thing for me to do is just contribute that exact amount bi-weekly to her non-registered investments. Our pay goes into two different accounts, though both are joint accounts. She has a few pre-authorized bills going out of her account, which I haven't bothered switching over to mine. Obviously it would be cleanest if there were no bills coming out of hers... but I'd prefer not to switch these unless I really have to. I'm not sure it matters as long as it can be tracked though. I'd just move her money out and then move mine in to cover the bills. I'd automate all of this. A little messy, but would it be an issue from tax perspective? Similarly, is there a really an issue with them both being joint accounts (vs. individual)... I'm hoping as long as the flow of funds can be traced, we don't need to be too buttoned down from this standpoint. Could be wrong?!
> 
> 
> 
> ...


Geez Eclectic - you missed 1. and 3. the most important ones!

1. Yes I think this is a concern. Of course you might "get away" with it for a while, I don't know. But I don't think her actual money being spent on bills can be offset by you claiming "well actually I wanted to pay for that so it was really my money." Change the bills to your name.

3. Well you better do the math, because I don't think this works like you think it does.

If your marginal rate is 50% and hers is 25%, it goes something like this:

-You loan her 100k
-She pays you $2000 interest per year
-You pay $1000 income tax on $2000 interest received.

-She invests money in stocks, and earns 3% dividends and 3% capital gains per year, @ ~10% and 12.5% tax rates respectively.
-She pays $300+$375=$675

Total family tax bill: $1675

VS. NORMAL:

-Wife has no money to invest - $0 tax
-You invest your $100k in stocks, earning 3% dividend and 3% capital gains @ 30% and 25% tax rates respectively.
-You pay $900 + $750 = $1,650

As you can see, this doesn't accomplish anything.

The only way it works, is if her investment returns are unrealistically large, and your income disparity is massive. i.e., you make $300k+ and she makes below the first tax bracket, almost nothing.

Back when the loan rate was only 1% the math was a lot more forgiving since the loaner only paid half the tax. This strategy essentially does not work anymore for middle class income earners.

Side note: If your wife's investments do poorly, in her name, instead of your own, then it gets downright ugly. Requiring a 6% return just to break-even on this tax avoidance strategy is a bad plan.


----------



## peterk (May 16, 2010)

Edit: Wait, am I missing an aspect here... Does the wife get to write-off the $2,000 in loan payments? Against her total income at marginal rate? So $2000 x 25% = $500?

That does make it more favourable. But still one must watch out for the difference in the tax rates, and the needed minimum RoR from the wife's investments to make it beneficial.

EDIT 2: Nevermind the above post. The math actually works quite well, even for only moderate income disparity, especially if the goal is to transfer over high-dividend Canadian stocks from the husband to the wife's account.

A moderate income disparity might get you about 0.5%/year in extra after tax return. A high income disparity could get you about 1%/year in extra after tax return. Not bad. I'm definitely going to think about executing this in the future...

EDIT 3: Actually, you could get even >1%/year return with a high income disparity. I was just looking at Alberta, with more fair tax rates. High progressive tax provinces with high dividend credits would be even better!


----------



## twa2w (Mar 5, 2016)

If the wife in this case has gross income every two weeks of 600.00 but net income of 500.00, The husband should issue her a cheque for 100.00 to cover income tax.
Then the wife should invest the 600.00

They should open a non-registered investment account with her as the principal account holder and him as secondary.
T-slips will be issued in her name. Her money should be invested in that account.


If the husband also has n/r investments, another account should be opened with him as the principal holder and her as secondary.

It can be done with one account and funds allocated accordingly but the paperwork is more onerous especially if spousal loans are involved.

If in addition they want to do a spousal loan, great.

However they may end up with multiple spousal loans - if husband lends her money this 1/4 at 2%, that 2% is for the life of the loan. It should be documented with a promissory note and a cheque issued by the spouse each year for the interest.
If the husband has more money to invest next year, and the rate is 3%, then a second loan will be required.

If rates drop to 1%, the spouse should pay back the first loan and a larger new note be signed at the lower rate.


----------



## Eclectic12 (Oct 20, 2010)

peterk said:


> Geez Eclectic - you missed 1. and 3. the most important ones! ...


I figured others could cover it versus the ETF info ... was I wrong? 




peterk said:


> Edit: Wait, am I missing an aspect here... Does the wife get to write-off the $2,000 in loan payments? Against her total income at marginal rate? So $2000 x 25% = $500?


As long as the use of the money can be traced to eligible investments then yes, the interest she is paying is tax deductible against any other income. 

Most would be hoping the tax deduction would be against the hopefully growing investment income with sizeable unrealised CG being cashed in at a much lower level than retirement for a $200K income earner would have.




peterk said:


> ... The math actually works quite well, even for only moderate income disparity, especially if the goal is to transfer over high-dividend Canadian stocks from the husband to the wife's account.


Not sure it's a transfer so much as adding in the one account while possibly looking for CG only in the husband's account ... but I have not spent a lot of time thinking about it.


Cheers


----------



## birdman (Feb 12, 2013)

Have you thought about purchasing your wifes 50% interest in the matrimonial home. Would need professional advice and have your accountant and lawyer to draw up the paperwork but would allow you to work some cash into your wifes name.


----------



## johnnoandy (Sep 4, 2014)

Hello again friends... I think I'm ready to make everything happen. Wanted to run all the steps/process by the group... looking for feedback on if I've missed anything, and then a few specific questions about how the loan is structured. Also, if I'm overdoing it in anyway and can simplify this, I'd love to hear suggestions as it's quite complicated!! My underlying assumption, which I'm not 100% clear on is that we just have to balance everything appropriately and document once a year come tax time. Other than that, after initial set-up, everything else is just moving the funds throughout the year.

1. I will immediately make a lump sum payment of around $35K to a new non-registered account in my wife's name. This is more than her income will be for the entire year, but I don't think that matters as we'll balance it all out at tax-time to pay me interest as a loan on any overage vs. her final years income. The contribution will go into a non-registered conservative/balanced Wealthsimple account (ETF's). I'll dial up the risk tolerance on existing registered stuff. My thinking is that it's better to have the higher yielding stuff in registered, lower-yielding in non-registered - less gains, less tax. I'm not looking for input on the investment product nor allocation, only mentioning in case this doesn't make sense for from a tax perspective. Once set-up, the balance with be transferred from an existing non-registered savings account in her name (nominal amount) and from our joint chequing account.

2. Get all our accounts in order to show all the expenses are being covered by me. Our payroll both comes into same account today. I'm going to get mine switched to a separate account, and also move all the pre-authorized bills over to this new account. All other types of bills such as credit card, property taxes etc. will be paid manually from my new account going forward. Her payroll gets moved out of her chequing account bi-weekly to the investment account. Any excess I have in my account bi-weekly after bills are paid, I then move to her account, which she in-turn moves to the investment account. This shows the flow of funds. Does it matter that I'd be doing this *after the initial lump sum amount, above? It will take time to organize it all.*Note: some of the bills e.g., Union Gas show in her name with the company. I'm assuming CRA won't care about that... it's sufficient to show Union Gas as a transaction being paid by me.

3. Tax-time. Everything in her investment account will obviously be shown as under her name - the point of this exercise. I will subtract her final income from the year, from all the contributions made to the account. This amount will be how much the loan ends up being. I will put that number into the promissory note, showing charge at the 2% prescribed rate. This document will be filed away in case we need to show it. She will then transfer the 2% amount back to my account to show that the interest has been paid. Note: I don't believe I need to claim anything on gains as it's all in her name. 

This is basically it as far as I can tell. Please poke away and let me know if I'm missing anything!

My specific questions on loan configuration are as follows:
- Do we need to show the transfer of 2% interest back to my account? i.e., does the government care whether it's actually paid. I understand either way I need to claim it at income. I've assumed we do need to do this.
- Is it possible that the prescribed rate changes in the middle of the year? If so, how does that work... does it become a blended rate? 
- Does it matter which account the tax return goes to? Currently goes to our joint chequing.
- What do I show as the loan start date? Presumably it's whatever date the loan goes above what her income ends up being? That would be immediate. It's not like a real loan as we'd do it later at tax time.
- Is it OK to do one loan per year i.e., one amount, interest compounded annually, and paid annually? This is even though we'll be moving the money over bi-weekly come pay time? Really hoping it's not a new loan every pay cheque! 
- What date does the loan need to be paid by if structured as I've outlined to be paid once a year?
- I'd be using the following promissory note template. I'm no lawyer, but it looks good enough to me (lawyerish) 
https://www.lawdepot.ca/contracts/p...DwHPZR2ODfveSzEkpCwaAlKfEALw_wcB#.XHFTQORKi70


----------



## gibor365 (Apr 1, 2011)

> as it's quite complicated!


Everything is very complicated . And in any case, if CRA wants , they will "prove" that you are wrong. 
In our case, I declare T5 income on IND slips respectively and on JOI 50/50.


----------



## fireseeker (Jul 24, 2017)

johnnoandy said:


> 1. I will immediately make a lump sum payment of around $35K to a new non-registered account in my wife's name. This is more than her income will be for the entire year, but I don't think that matters as we'll balance it all out at tax-time to pay me interest as a loan on any overage vs. her final years income.


I am far from a tax expert, but I have doubts about your idea of proactively funding her account.
In essence, this would be a loan. And I don't think you can simply balance it out at the end of the year. If you lend her $35K, and she earns $30K over the course of the year, that doesn't make it a $5K loan. It's a $35K loan that she has largely paid back. Interest would have to be calculated accordingly, every two weeks as the balance changes.

I think you need to do two separate things. One, let her biweekly income accrue in its entirety in its own account and invest that. Two, lend her a fixed amount -- $35K or $350,000K or whatever -- and charge her 2% interest each year. (See Twa's post #19 for details on the rate.) She literally writes you a cheque and you literally deposit it in your account. You declare the interest income, she writes off the interest payment against her investment returns.


----------



## AltaRed (Jun 8, 2009)

Gibor simply can't make up his own rules as noted. The loan has to be real and interest payments have to be real. 

There is either a spousal loan with the prescribed rate of interest that has to be paid with records of the loan agreement AND the transaction records for interest payments to show it, or wifey has to make her own deposits to her own non-registered account as and when she can.

Added: Any spouse can pay any portion of household bills. Should be obvious who it is from the accounts from which the payments were made, albeit a joint chequing account will do provided the appropriate spouse has been making the deposits to that chequing account to cover those bills.


----------

