# SM tax questions



## Jungle (Feb 17, 2010)

If we (Spouse and I) use a HELOC to invest and it's jointly owned, who would claim tax deduction? Would it easier if one person's name is on it?


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## Jungle (Feb 17, 2010)

Found this on tax tips.ca:

"When investments are held in a joint account, the investment income should be reported based on the funds contributed to the account by each spouse. If the funds were provided equally by both spouses, then the investment income would be split equally. This subject is covered in the Canada Revenue Agency (CRA) web page Line 121 - Interest and other investment income, under the topic of Bank accounts.

In order for the lower income spouse to be able to claim more investment income, finances should be arranged so that the lower income spouse has money to invest."

Would that make it more complicated to make a paper trail clear from loan to investments?


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## OptsyEagle (Nov 29, 2009)

Either one can claim the tax deduction or both claim half, however, whichever way you go, that person/s must claim all the future investment income and any capital gains.


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## cardhu (May 26, 2009)

You cannot have just one person’s name on a HELOC, if the home is jointly owned ... not to worry, though, that doesn’t make any difference to the division of income/deduction. 

If you’re borrowing 100% of the cost of the investments, then you have some discretion to strategically arrange the income/deductions between the two spouses, in whatever way works best, provided you make those arrangements in advance. Therefore, it is worthwhile giving it some consideration before acting. One thing you can’t do is assign the income to one spouse, and the deductions to the other spouse ... they have to match up ... another thing you can’t do is arbitrarily change the split from year to year. 

It is always better to have a clean paper-trail, so whoever will be the one claiming the income/deductions, should also be the one who services the debt ... monthly interest payments, etc.


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## Jungle (Feb 17, 2010)

cardhu said:


> You cannot have just one person’s name on a HELOC, if the home is jointly owned ... not to worry, though, that doesn’t make any difference to the division of income/deduction.
> 
> If you’re borrowing 100% of the cost of the investments, then you have some discretion to strategically arrange the income/deductions between the two spouses, in whatever way works best, provided you make those arrangements in advance. Therefore, it is worthwhile giving it some consideration before acting. One thing you can’t do is assign the income to one spouse, and the deductions to the other spouse ... they have to match up ... another thing you can’t do is arbitrarily change the split from year to year.
> 
> It is always better to have a clean paper-trail, so whoever will be the one claiming the income/deductions, should also be the one who services the debt ... monthly interest payments, etc.


My spouse has the lower income (under 36K) and she would receive money back from the dividend tax, -6.23% according to taxtips. It works out to be more profit (than me) for her to claim the interest on the loan and receive the dividned credit. With my marginal tax rate and dividned tax, I don't make as much profit. 

So with that said, if the house is jointly owned, the bank will put the HELOC in both names (makes sense)

You said: "that doesn’t make any difference to the division of income/deduction. "

This is good. 

So we can get around this if the investments are in her name, and her money services the loan with clean paper trail?


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## FrugalTrader (Oct 13, 2008)

Jungle, even though your wife would benefit most from the dividend tax credit, the higher income spouse would benefit most from the interest tax deduction. So you need to weigh both factors, claiming the interest AND the dividend tax credit with either spouse or a combination. For us, we just kept things simple and split things 50/50.


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## cardhu (May 26, 2009)

It doesn’t matter whose name the investments are in ... the income is attributed to whoever provided the funds ... in this case, we’re using “servicing the debt” as a proxy for providing the funds, so if you arrange things so that she is the only one servicing the debt, making interest payments, etc., then you can argue the income is all hers to report, regardless of whose name the investments are in ... and vice versa, of course. 



jungle said:


> With my marginal tax rate and dividned tax, I don't make as much profit.


Are you sure about that? What are your assumptions? I think you are counting only the cash flow and ignoring capital growth ... cap growth is part of “profit”, even if it won’t become taxable for many years into the future ... secondly, even on a short-term cash flow basis, interest rates fluctuate, and if you’re leveraging 100% of the value of your investments, then you can expect interest expense to exceed your dividend income stream, some of the time ... it doesn’t take much of a reversal to shift the greater “benefit” to the upper tax brackets, from the lower ... thirdly, her marginal rate for dividends might be -6.22% at the moment, but there are only 8 months left in 2010, and then it won’t be -6.22% any more ... in 2011 it’ll be -3.93% and in 2012 it’ll be -1.89% (assuming her income remains at the same level, and assuming there are no further changes introduced in the interim)

If this is a long-term strategy, and not a quick-turnaround, jump-in-and-jump-out kind of scenario, then you should be looking at how the strategy fits into your overall long-term plan, and act accordingly. Look beyond your 2010 tax bill to your overall situation not only through the remainder of your working life, but also into retirement ... sometimes a short-term sacrifice leads to a long-term benefit.


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## Jungle (Feb 17, 2010)

FrugalTrader said:


> Jungle, even though your wife would benefit most from the dividend tax credit, the higher income spouse would benefit most from the interest tax deduction. So you need to weigh both factors, claiming the interest AND the dividend tax credit with either spouse or a combination. For us, we just kept things simple and split things 50/50.


Yes makes sense. For tax purposes, it makes sense also to split 50/50. So 50% of the loan interest and dividend tax is at your tax rate and the other 50% loan interest and dividend tax is under your spouses tax rate?


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## Jungle (Feb 17, 2010)

cardhu said:


> It doesn’t matter whose name the investments are in ... the income is attributed to whoever provided the funds ... in this case, we’re using “servicing the debt” as a proxy for providing the funds, so if you arrange things so that she is the only one servicing the debt, making interest payments, etc., then you can argue the income is all hers to report, regardless of whose name the investments are in ... and vice versa, of course.
> 
> 
> Are you sure about that? What are your assumptions? I think you are counting only the cash flow and ignoring capital growth ... cap growth is part of “profit”, even if it won’t become taxable for many years into the future ... secondly, even on a short-term cash flow basis, interest rates fluctuate, and if you’re leveraging 100% of the value of your investments, then you can expect interest expense to exceed your dividend income stream, some of the time ... it doesn’t take much of a reversal to shift the greater “benefit” to the upper tax brackets, from the lower ... thirdly, her marginal rate for dividends might be -6.22% at the moment, but there are only 8 months left in 2010, and then it won’t be -6.22% any more ... in 2011 it’ll be -3.93% and in 2012 it’ll be -1.89% (assuming her income remains at the same level, and assuming there are no further changes introduced in the interim)
> ...


Thank you. I was basing the cash flow and tax rates for this year. I forgot to think about all tax rates in the future and capital growth. With the dividend tax rate going down, it makes sense to maybe have my tax rates used for it, in the next few years. Ideally I would keep the non-reg portfolio for the long term and retire off the income it produces. 

Other than selling dying stocks or rebalancing for risk, how would capital growth be tied in to our tax rates? 

Do you mind sharing where you got those future dividend tax rates?
Thank you.


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