Author Topic: Advice on Using a Joint Taxable Account? (Canadian)  (Read 320 times)

Chaplin

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Advice on Using a Joint Taxable Account? (Canadian)
« on: July 15, 2018, 05:52:27 PM »
Now that we've finally maxed out the tax-sheltered accounts it's time for a taxable account. Tax-sheltered accounts are all individual, but a taxable account can be joint.

The write-up below is a bit long-winded, so here's the TLDR:
1. Any reason favor a joint taxable account for my wife and me or two individual accounts?
2. We use a Canadian Couch Potato portfolio so my plan would be to have the Canadian dividend-paying ETF (VCN) as the only investment in that account due to the favorable tax treatment of qualified dividends. I assume this is a pretty common strategy. Does anyone have any comments on that strategy, about using VCN in a taxable account, any challenges with ACB (Adjusted Cost Base), etc.?

1. Joint or Separate Accounts?

What I'm trying to figure out is whether my wife and I should use a joint account or each get our own. I'm leaning to joint because I don't see any disadvantages. At tax time you still have to claim income on the basis of who contributed how much. Separate accounts doesn't change that. Our initial deposits will come from the proceeds of selling our house, which is easy to argue is split 50/50 between us. Subsequent contributions will come from my income since I'm working, so I would be reporting a higher split of the income each year at tax time. That doesn't change with separate accounts. If the money came from me, even if it goes into a separate account her name, the income goes on my taxes.

Now, CRA allows one spouse to lend the other money to invest. Interest has to be charged and the current rate is 1%. Based on that, I should loan her my 50% of the house proceeds and any subsequent amounts we want to invest in the taxable account so any gains are entirely taxed as her income since her marginal tax rate will be much lower than mine. I have to report the 1% interest as income to me, but if the account ends up with $200K of contributed funds, of which $50K is her portion of the house proceeds, she would have to pay me interest on the $150K loan. 1% per year of $150K is $1500, and I would probably end up paying $400 of tax on that extra income. I wonder if CRA would want to actually see a withdrawal of $1500 from the taxable account since the only other way she could pay me would be out of our joint chequing account, which would be funded entirely by my income at that point, so can't really be argued as being a payment from her to me. If she did have to withdray $1500 to pay me I would just turn around and lend it back to her of course...

Overall, I gather that CRA wants to see something reasonable in terms of the split of the source of the funds since it's hard to be exact. After all, if I made $100K and my wife made $20K, and she contributed exactly $20K (or whatever the after-tax amount was), would CRA argue that it wasn't reasonable since if we had split other expenses like food and housing she wouldn't have had that much to invest? They don't want a joint account to be a backdoor way to achieve income splitting, but I wonder how exact they want this inherently inexact process to be. Again I don't see how separate accounts make it any easier since it's where the funds came from that matters.

2. VCN

We use a Canadian Couch Potato portfolio so my plan would be to have the Canadian dividend-paying ETF (VCN) as the only investment in that account due to the favorable tax treatment of qualified dividends. I would sell off as much VCN in our tax-sheltered accounts as needed and replace it with the other components of the portfolio to maintain our AA. I assume this is a pretty common strategy. Does anyone have any comments on that strategy, about using VCN in a taxable account, any challenges with ACB (Adjusted Cost Base), etc.?

Retire-Canada

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Re: Advice on Using a Joint Taxable Account? (Canadian)
« Reply #1 on: July 15, 2018, 06:23:45 PM »
Two thoughts on VCN:

1. When you gross up your dividends it can affect some income tested benefits since $1000 of dividends is counted as $1380 of taxable income. Then you'll get your Federal dividend tax of ~15% or $207 and the BC credit of 12% or ~$166. So your total credit is ~$373. For income tested benefits your income will be $1380 though....not $1000.

2. Combined Fed & BC marginal tax rates for qualified dividends:

-- first $40K = -6.84%
-- $40K to $46.6K = -3.2%
-- $46.6K to $79.3K = 4.39%

So the benefit degrades with higher taxable income.

FWIW my NR account is 100% VCN. My anticipated annual taxable income in FIRE is $46K from RRSP and say ~$5K in qualified CDN dividends that will get reinvested back into VCN and I'll spend the $46K.

Disclaimer - I rounded numbers and didn't verify everything back to CRA and BC Gov sources.

RichMoose

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Re: Advice on Using a Joint Taxable Account? (Canadian)
« Reply #2 on: July 16, 2018, 08:14:56 PM »
1. Joint or Separate Accounts?

What I'm trying to figure out is whether my wife and I should use a joint account or each get our own. I'm leaning to joint because I don't see any disadvantages. At tax time you still have to claim income on the basis of who contributed how much. Separate accounts doesn't change that. Our initial deposits will come from the proceeds of selling our house, which is easy to argue is split 50/50 between us. Subsequent contributions will come from my income since I'm working, so I would be reporting a higher split of the income each year at tax time. That doesn't change with separate accounts. If the money came from me, even if it goes into a separate account her name, the income goes on my taxes.

Now, CRA allows one spouse to lend the other money to invest. Interest has to be charged and the current rate is 1%. Based on that, I should loan her my 50% of the house proceeds and any subsequent amounts we want to invest in the taxable account so any gains are entirely taxed as her income since her marginal tax rate will be much lower than mine. I have to report the 1% interest as income to me, but if the account ends up with $200K of contributed funds, of which $50K is her portion of the house proceeds, she would have to pay me interest on the $150K loan. 1% per year of $150K is $1500, and I would probably end up paying $400 of tax on that extra income. I wonder if CRA would want to actually see a withdrawal of $1500 from the taxable account since the only other way she could pay me would be out of our joint chequing account, which would be funded entirely by my income at that point, so can't really be argued as being a payment from her to me. If she did have to withdray $1500 to pay me I would just turn around and lend it back to her of course...

Overall, I gather that CRA wants to see something reasonable in terms of the split of the source of the funds since it's hard to be exact. After all, if I made $100K and my wife made $20K, and she contributed exactly $20K (or whatever the after-tax amount was), would CRA argue that it wasn't reasonable since if we had split other expenses like food and housing she wouldn't have had that much to invest? They don't want a joint account to be a backdoor way to achieve income splitting, but I wonder how exact they want this inherently inexact process to be. Again I don't see how separate accounts make it any easier since it's where the funds came from that matters.
You should always go with joint accounts. The question is do you want one joint account that you share, or two joint accounts where each account is contributed to by just one individual.

The benefit of keeping separate joint accounts is that tracking is extremely easy and you would have little problem with making spousal investment loans and justifying the paper trail if questions ever arose. You would also be able to easily explain that your spouse is saving her entire $20,000 into her account while you pay all household expenses, both of your TFSA contributions, etc. and save the remaining in your account.
You could also structure her account to pay more dividends and your account to distribute less income.

The downside is that you are more or less locked in and it is more difficult to administer than a single account.

2. VCN

We use a Canadian Couch Potato portfolio so my plan would be to have the Canadian dividend-paying ETF (VCN) as the only investment in that account due to the favorable tax treatment of qualified dividends. I would sell off as much VCN in our tax-sheltered accounts as needed and replace it with the other components of the portfolio to maintain our AA. I assume this is a pretty common strategy. Does anyone have any comments on that strategy, about using VCN in a taxable account, any challenges with ACB (Adjusted Cost Base), etc.?
Just don't sign up for DRIP or synthetic DRIP. Aside from that ACB is easy.

Chaplin

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Re: Advice on Using a Joint Taxable Account? (Canadian)
« Reply #3 on: July 16, 2018, 10:38:43 PM »
Thanks @Retire-Canada and @RichMoose. Looks like a single, joint account with no-DRIP VCN is on order. Sounds like a coffee order.

To the brokeragemobile!