Avoid tax traps when opening a joint investment account

Q: I have a non-registered discount brokerage account containing stocks and mutual funds. If I wish to open a joint brokerage account in both my and my wife’s name, so my wife would have access to the assets, would there be any tax implications if I transfer all my assets into the joint account?
–WD

A: Some spouses ensure all their accounts are joint. Others maintain mostly separate accounts and even manage their finances quite separately. It’s not uncommon for a point to come where spouses wish to make individual accounts into joint ones, often for estate planning and administration.

Ask a Planner: Leave your question for Jason Heath »

If you open a joint account and transfer the stocks and mutual funds in kind – as is, without selling them – there will be no immediate capital gains tax implications. That is, it’s not like you sold them. The default implication of a transfer of a capital asset like a stock or mutual fund to a spouse is that it happens at its tax cost, such that your cost would become your spouse’s tax cost for capital gains purposes.

READ: These three people moved out of Toronto. How much does it really cost to move out of the city?

However, if you transfer capital assets to your spouse, whether to a joint account or to them personally, attribution will generally apply. Spousal attribution causes income or capital gains to be taxed back to the contributor spouse–you in this case, WD. So, the result may be that future dividends, interest, distributions and capital gains all end up back on your tax return. So, though the transfer may happen at cost, with no immediate capital gains tax payable, when you sell, capital gains will be attributed back to you and taxed on your tax return.

You may be OK with this outcome, as it sounds like the intention here is to give her “access,” so it’s a case of administration or estate planning and not tax driven.

Sometimes, when spouses have individual investment accounts, I suggest they add each other onto the accounts as joint with rights of survivorship. This assumes they want the account to go to their spouse on their death anyway. To properly identify the taxation of the accounts, your account, WD, might be named with your name and Mrs. WD’s, while your wife’s account might be named Mrs. WD and with your name. You would know that the for tax purposes, your accounts would go to the first named on the account.

If you wanted the resulting investment income to go to your spouse, there are ways to accomplish this as well. You can consider a spousal loan at the CRA prescribed rate of interest, which is currently 2%. You would effectively loan your wife money at 2% interest, which she would have to pay you every year by January 30 for the previous year’s accrued interest. You would claim the interest as income, she would claim the interest as a tax deduction, but the investment income exceeding 2% interest would effectively be shifted from you to your wife. If you’re in a much higher tax bracket than your wife and have a lot of taxable investments, this could be worth considering.

MORE: Invest in your spouse’s name to save on taxes

Some families take it a step beyond a spousal loan strategy and establish a discretionary family trust. A trust is a legal relationship between a settlor, who establishes a trust, trustees, who manage the trust, and beneficiaries, who benefit from the trust assets. It is established by a trust deed prepared by a lawyer that could cost up to $5,000 or more in legal fees.

Sometimes, spouses may consider a trust instead of a spousal loan if there are significant non-registered assets and there are other family members like children or grandchildren for whom they want to use or allocate the trust income. A properly established discretionary family trust may allow someone with a high income to legitimately split income with lower income dependents.

It’s not uncommon for people to open joint accounts or add spouses or children to an account without properly considering the tax, family law or estate planning consequences. I think it’s important to be aware of the implications to ensure it’s what you want and nothing adverse results. In your case, WD, it sounds purely administrative. Just make sure the investment income is properly reported on your tax return after the change. 

Ask a Planner: Leave your question for Jason Heath »

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

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.

Linkedin Twitter Facebook Website