Can you save on taxes by owning an investment account with your child?

When you give cash or assets to a family member to invest, there may be attribution of that income back to you. Attribution causes income to be taxed on the original taxpayer’s income tax return. Attribution applies:

• Between spouses. So, if a high-income spouse gives money to their low-income spouse to invest, with the goal of reducing their tax payable, the attribution rules apply.
• To some income between a parent and a minor child. Interest and dividends are taxable back to the parent, but capital gains are taxable to the child. So, you can accomplish some income splitting with a minor child.

Attribution does not apply between a parent and an adult child, unless the funds are loaned to the adult child at a low interest rate or at no interest rate. In the case of a low- or no-interest loan, where it seems the intention is not to truly gift the money, but to reduce tax payable on the income for a period of time, there is attribution. As with a minor child, it applies to interest and dividends, but not capital gains.

Can you avoid capital gains tax by gifting an asset?

When an asset is outright gifted to a child, there’s a deemed disposition. The asset is considered to be sold to the child at the fair market value, and any accrued capital gains become taxable. So, you cannot avoid tax by gifting an asset, like a cottage, for one dollar, for example.

It does not appear you have made a gift to your son, Jing. You intend to continue to report the income. So, there is no capital gain and there is no attribution. You should just continue to report the income on your tax return.

Legal ownership vs beneficial ownership

This is a case where legal ownership—whose name is on an asset—does not match the beneficial ownership—who technically owns the asset. Legally, the account is joint. Beneficially, the account belongs to you.

This creates tax consequences for you that may be unintended. Trust rules have changed for 2023 and future tax years. If you have an account, like your brokerage account, Jing, where the legal and beneficial ownership are different, you need to file a special tax return.

New trust reporting rules for 2023

A T3 Trust Income Tax and Information Return is used by trusts to report trust income as well as information about the settlor, trustees and beneficiaries of the trust. Although you may not have established a trust with a lawyer, or even consider this joint account to be a trust, the Canada Revenue Agency (CRA) considers it a trust.

The CRA makes an exception for “trusts that hold less than $50,000 in assets throughout the taxation year (provided that the holdings are confined to deposits, government debt obligations and listed securities).”

It bears mentioning, Jing, that a deemed disposition occurs when you die. So, the fair market value of the investments on your date of death are reported as the sale proceeds. This triggers capital gains and tax payable.

I come across people who think they can avoid capital gains tax by adding their children’s names to an asset. That is not true.

Can you avoid probate fees?

Another point worth mentioning relates to probate or estate administration tax. Seek legal advice in your province or territory of residence, Jing. If you live in Ontario, for example, the Ontario Ministry of Finance Estate Information Guide for calculating estate administration tax (probate) states: “Remember to include all property in which the deceased had a beneficial interest, even if the deceased did not hold legal title and legal title was held in another person’s name.”

Joint ownership of assets with a child is a common strategy to avoid probate in Canada, but it may not work. It also exposes your assets to your son, Jing. You may not worry about elder financial abuse because you trust your son, but even if you trust him implicitly, there may be situations beyond his control that put your assets at risk.

What happens if your son becomes disabled? The person named as his power of attorney may suddenly become involved with your finances. What if he gets divorced or is sued for a car accident and there’s a claim made on the account? Your son’s situation later in life may add complexities to your own finances.

The risks of joint ownership with a child

The point I’m trying to make here is that here are risks to jointly owning assets with a child. There may be no tax savings and no estate benefit and, in fact, there may be increased tax filings and associated costs.

In this instance, Jing, your son could help with the account and your other assets just as easily as your power of attorney. This would give him a higher fiduciary responsibility. And you could name a replacement if your son cannot act due to disability, death or otherwise declining health.

Read more about joint accounts:

• Should you consider using joint accounts to avoid probate?
• Video: Five things to know about joint bank accounts
• How spouses with joint accounts should claim capital losses
• What is joint tenancy?

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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