Splitting capital gain and investment income, where should we attach the T5 &T3 to?

My wife and I have a joint investment account for about 7 years and have our own individual investment accounts for different length of time(3years for her,2 years for me).

1. For the last 7 years I have declared all the capital gains and investment income of our joint account and my individual account on my income tax return which is pure ignorance and to our disadvantage even though the the total amount was not large.

2. Now we want to declare 50%/50% of our capital gain and investment income of our joint account because the amount is becoming quite significant.

3. Can we just ignore the past and start to do this now?Do we need to explain to CRA?Do I need to attach all the T5 and T3 slips on both of our returns?(Then we would have no copies of our own.)

We thank you very much for the help!

david ingram replies:

1. Under Section 74.1 of the Canadian Income Tax Act, The account is taxable to the spouse who put the money into the account. Therefore, If you gave her $10,000 and she puts it into an account in her name, any earnings in that account on the first $10,000 is taxable to YOU forever. The earnings on the earnings are taxable to her however.

Therefore, if you put the money into the joint account seven years ago, any earnings on the original amount or any further amounts you put in are correctly taxable to you. These are called the 'Attribution Rules'.

But, if the earnings were left in the plan, 1/2 of the earnings on the earnings would be taxable to her.

On the other hand, if the joint account was an inheritance from her father and was put into a joint account, the reverse would be true and everything on the original amount would be taxable to her with 1/2 of the earnings on the earnings taxable to you.

The same is true of the individual accounts you have.

Your question is really based upon, 'what happens if you suddenly switched'? The answer is that in 43 years in this business with 155 offices of my own in 5 provinces and the management of H & R Block offices before that in three provinces, I have only seen the tax office go after two couples under the attribution rules. And that involves the preparation of well over 3,000,000 tax returns over .

The ONLY ones I saw were H & R Block clients in Saskatchewan. One was in Kipling Saskatchewan and the other in Weyburn Saskatchewan and I won both by tracing minor amounts of money that the wives had earned and saved during World War II as being justification for the husbands splitting the proceeds from the family farms which were sold 30 years later. The farms, of course, were only in the Husband's names under the VLA (Veteran's Land Act) rules but it was the $1,000 or $1,500 that the wives had saved which was used to get the farms going.

In your case, it may be that if you gave your wife the money, you were just paying her back while she supported you through electrical engineering.

In truth, you need to do a spread sheet and figure out what is what 'just in case'.

It may be that the split should be 38% <> 62% or 20% <> 80% or 49% <> 51% but you can certainly make the switch without much worry about being questioned by the CRA, particularly since Stephen Harper's government is clearly on track for a joint tax return sometime in the future.

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