Canada’s income tax structure means that the collective tax paid by two spouses each earning $50,000 is less one spouse earning $100,000. This framework is what makes spousal income splitting desirable.
Like other income, earnings from a non-registered account are subject to tax. Logically, one may assume that earnings on joint spousal accounts could be shared between spouses.
Not so fast! The earnings must be claimed in the proportion to which the owners contributed to the account. For example, imagine a scenario where Spouse 1 is the sole income earner and always has been. Spouse 2 has not earned an income nor had any other means of directly contributing to the account. Naming both spouses on the account does not allow for the reported earnings to be split on their respective tax returns. Canada Revenue Agency could either audit or reassess the return, and request evidence that Spouse 2 also contributed to the account.
While CRA has not traditionally focussed their efforts on joint account review, the agency could be coming under pressure to seek revenue to offset the government’s COVID-19 related costs. Regardless of whether more aggressive audits are forthcoming, the fact is that any taxpayer is subject to being audited. Ensuring that your tax returns are on the right side of the rule is therefore worthwhile.
Opening a joint spousal account or adding a spouse’s name to an individual account often makes sense, even if earnings cannot be split. Spousal joint accounts are easier to administer once the first spouse passes away, and also avoid probate. In the case where only one spouse will be claiming the earnings, common practice is for that spouse to be named first on the account.
Joint ownership may not always be desirable in second marriages, on accounts owned prior to marriage, and on accounts seeded by an inheritance.
While splitting income is not as easy as creating a joint account, it can be legitimately achieved by using a spousal loan strategy. Spousal loans can be appropriate when one spouse is in a higher tax bracket than the other. The higher income spouse enters into a prescribed loan arrangement with the lower income spouse, using non-registered funds. The idea of “lending” money to your spouse may seem puzzling, however, this tax strategy is in line with CRA rules and can lower your family’s overall tax bill. Stay tuned for more information on spousal loans in a future post.
Be sure to speak to an advisor about whether joint spousal account ownership or a spousal loan strategy is right for you.
Morgan Ulmer CFP®
Certified Financial Planner® professional
Morgan joined the team in February, 2019 with 8 years of financial planning and financial literacy training under her belt. She is as comfortable working on complex financial planning engagements as she is helping young adults understand budgeting and debt management.
Rona Birenbaum is a certified Financial Planner and is licensed to do financial planning. Rona is registered through separate organizations for each purpose and as such, you may be dealing with more than one entity depending on the products purchased. Rona is registered through Caring-for-Clients for financial planning services. This website is not meant as a solicitation for financial advisory services. Financial advisory services are available through the facilities of Queensbury Strategies Inc. Financial Planning is not the business of or under the supervision of Queensbury Strategies Inc. and Queensbury will not be liable or responsible for such activities.