Income splitting of investment income between spouses or partners is not permitted under Canada's Tax Act due to the so-called attribution rules.
These are a complex set of rules that attribute any interest, dividends or capital gains earned by one spouse or partner back to the spouse or partner who provided the funds that generated the income or gains.
A recent tax case reveals that the Canada Revenue Agency is starting to take a closer look at attempts to split income between spouses. During the period of 1997 to 1999, Louis Muio received interest income, dividend income and capital gains from various investment accounts in his name alone. Yet on his tax returns for the years in question, Mr. Muio reported only half the interest income, dividend income and capital gains, allocating the other half to his spouse -- despite the fact the investment accounts were owned solely by him.
Mr. Muio testified that there were problems in his marriage and as a result, he made sure that most of his investment accounts were in his name only.
According to the judge, "[Mr. Muio] wanted the best of two worlds. He wanted the majority of the investment accounts in his name only and yet he wanted his spouse to share the burden of the taxes."
The CRA produced evidence showing that his spouse had reported no employment income from 1987 to 1993, and from 1994 to 2000, her average employment income was only about $10,000.
Mr. Muio's employment income ranged from $75,000 to $163,000 in the years in question.
The court concluded that the capital for the investment account must have been provided by Mr. Muio, since he failed to provide any evidence that his spouse contributed any money. The judge reassessed Mr. Muio for 100% of the income and capital gains.
While this case centred on an account that was solely in one spouse's name, the same situation could have arisen with a joint account in which both spouses names appear on the account, yet only one spouse contributed the funds for investment.
It's important to document and maintain a record of the source of the funds -- in case the CRA comes knocking on your door.