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QUESTION:
Hi David,
I have been looking for a definitive answer to this question everywhere but I haven't found one. I hope you can help.
1. If a husband guarantees a bank loan for his wife, for investment purposes, is the investment income attributable to him or his
wife?
2. What would the attribution rules be if the principal residence, paid for exclusively by the husband, was registered in the wife's name exclusively and the wife subsequently obtains a loan for investment purposes, secured by the home.
3. While it seems that this is an effetive income-splitting strategy if the investment income is attributable to the wife (as I suspect), I would appreciate your opinion on the risk of the General Anti-Avoidance Rules applying in this case.
Thank you in advance,
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david ingram replies:
1. The general rule is that the income is attributed to him if she could not have made the payments without his help. If she was capable of making the payments and you merely co-signed the loan because she did not have a good enough credit rating or no credit history, the income would be hers.
2. You win. If you have given the house to your wife and she sells it, the profit is tax free. Any money she makes on the reinvestment of the profit, is taxable to her. However, anything she makes on reinvestment of the value of the actual house would be taxable to you. Your actual question is the same as the first one. If she can show that she has the financial resources to pay the loan, it is her profit. If not, it is yours.
3. If GATT was applied to you, You would be the first martyr in the country. Highly unlikely but anything is possible.
Remember that profit on profit is always taxable to the recipient.
So if you gave your wife $100,000 and she earned $10,000 the $10,000 is taxable to you. If you pay the tax, your wife now has $110,000. Next year, if profit is $11,000, $10,000 is still taxable to you but she pays tax on the $1,000 earned on the first year's $10,000 profit which was paid to her by a third party.
If the next year her $121,000 earned $12,100, the $10,000 on the original $100,000 is taxable to you but the $2,100 profit on her $21,000 is taxable to her.
As you can see, it gets better every year.
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