If you are married, borrow to invest or both, you can use multiple chequing accounts and brokerage accounts to segment and track your expenses and income for tax purposes.
Tracking Secondary Income
The Canadian Income Tax Act contains a set of rules that prevent you from transferring investments into your spouse’s name to have the income taxed in their hands. While the initial income received is taxed to the first person, any investment income earned from the initial income is taxed in the spouses’ hands.
How It Works
Here are the steps to track and avoid attribution on second generation investment income.
- Your spouse opens two brokerage accounts. Account A is the primary income and account B is the secondary income account.
- Gift the money or investments to your spouse and have him or her place the funds into account A. Be sure NOT to re-invest the interest and dividends.
- Transfer all of the interest and dividends into account B and re-invest these in other investments.
The tax slips generated on account A are attributed to the first spouse while the tax slips on account B are taxed in the second spouses’ hands.
Spouses Tracking Investments With Borrowed Funds
The Income tax Act generally requires the spouses in a marriage to keep track of each dollar earned before the marriage and every dollar earned since. This poses a unique challenge for couples who borrow to invest or have co-mingled funds.
How This Works
Each spouse needs to open a chequing account and a brokerage account. All of these accounts can be joint accounts with the other spouse (which is good estate planning). The husband’s accounts are registered with him as the primary and the wife a secondary. The reverse is done for the wife.
Each spouse deposits their own paycheques into their own bank account and in turn contributes to their own brokerage accounts. This process ensures assets are separate, while maintaining joint status and allowing one or both spouses to make decisions over all of the accounts.
The HELOC
If you intend to use a HELOC to invest and then split the income equally, you must ensure the funds from the HELOC is deposited equally into each spouses account and each spouse makes the same payments at the same time. This ensures the attribution rules do not apply.
You can choose any proportion to draw off the HELOC as long as the interest payments are in the same proportion.
How Do You Track Your Investment Income?
Do you use multiple accounts or do you simply add everything together? How do you decide how much is allocated between you both?
Share you experiences and thoughts with others.
