Change split investment income ratio?

[Overburdened]

During my working years I contributed the highest percentage to our non-registered investment portfolio, with my wife contributing a lesser amount.  For the purpose of tax filing, and due to attribution rules, I used a ratio of 80/20 to split income as this was a direct reflection of our employment income ratio.

 

We have not contributed to our non-registered account for a few years.

 

Now that we have retired, must I continue to use the above percentages to split investment income for tax purposes or can I now use a 50/50 split?

[Curmudgeon]

I believe that the split continues for the investment income and realized capital gains. For instance, here is an example for capital gains.

The general rule, then, is that you declare your capital gain based on the proportion of your investment at the time you made the investment.

For example, if you bought 200 shares of stock and then sold them, realizing a capital gain, all of the capital gain would have to be declared on your income tax because you are the one and only person who paid for the stock.

If, on the other hand, you and your spouse bought 200 shares of stock, and you paid 75 percent of the purchase price while your spouse paid 25 percent of the purchase price, you would declare 75 percent of the capital gain on your income tax and your spouse would claim the other 25 percent.

[AltaRed]

I agree with Curmudgeon. The attribution continues into perpetuity.

You could force a 50/50 split by getting a divorce and having a 50/50 Division of Assets but that would be a bit extreme.

[Overburdened]

Thanks for the replies Curmudgeon and AltaRed.  With respect, can  you please confirm if you have professional insight into this question or whether this is just your opinion?

[Curmudgeon]

If you are uncertain, call the CRA. Let's say I consider what I said an informed opinion based on some years of familiarity with the tax code but am not a representative of the CRA. Google attribution rules and read the comments to get a feel for the issue.

[Overburdened]

Thanks Curmudgeon.  Yes, I have Google'd attribution rules and reviewed the CRA web site but could never find anything specific to my question (at least not my scenario).  I plan to call CRA for clarity (hopefully will not have to wait a long time) but I am afraid you have probably provided the answer.  Thanks for your input.

[Curmudgeon]

I provided the CRA input. However, my rule of thumb is a 50-50 split. I view joint in a broader context: decision making, spending, responsibility, etc. The CRA disagrees with me but I view it as one of life's risks.

[AltaRed]

3 hours ago, Overburdened said:

Thanks for the replies Curmudgeon and AltaRed.  With respect, can  you please confirm if you have professional insight into this question or whether this is just your opinion?

Informed opinion from 2 decades of being involved in financial investing and tax matters, but not a licensed professional.  Your situation is common to almost every couple who has invested disproportionately over time and have not otherwise taken advantage of methodologies such as spousal loans to re-balance attribution over time. It won't change unless you can disproportionately 'withdraw' assets attributed to you specifically over time in your retirement.

What could have been done a long time ago when you and spouse were making investment contributions, is for you to disproportionately spend your income on household operating expenses while your spouse contributed the bulk or all of her 'net' income to the investment portfolio. That is perfectly within the rules. Example: You earn $100k while spouse earns $50k. If household expenses per year were $50k, you could have paid them all, allowing each of your spouse and self to contribute $50k each to the investment portfolio making it 50-50 all along.  You could also have funded a spousal loan where any returns your spouse earned on the loaned money would become the property of the spouse....and all your spouse would have had to do is to pay you interest on the loan at the CRA prescribed rate.

This link provides a concise explanation of various ways to level the playing field. https://www.mondaq.com/canada/capital-gains-tax/675958/the-tax-attribution-rules-a-response-to-income-splittinga-canadian-tax-lawyer39s-guide

The problem at this point is that you have been filing on an 80/20 basis for a definitive amount of time. You just cannot arbitrarily now re-allocate 'ownership' without doing things like spousal loans if you want to be legitimate. I would not want to try and finesse it and then have CRA query and ask for documentation. Tax evasion (even if small potatoes) is not worth the risk in my opinion.

P.S. Be careful of what any CRA agent on the phone tells you. Most of them give erroneous information and you could get 5 different answers from 5 different agents.

[Overburdened]

Thanks for the update AltaRed.  Good comments.  I'll do better next time.   🙄

[AltaRed]

This attribution issue is, in reality, all over the map. I suspect a tax accountant would say that a significant percentage of couples don't even know what 'attribution of income' means and automatically split joint accounts 50-50 since time began (to Curmudgeon's point really). Ignorance is bliss so to speak and I suspect CRA knows that and sees it on a regular basis and ignores it...especially if the tax leakage is minimal. In other words, a couple that has relatively balanced incomes within maybe a third of each other (my guess only as an example), CRA sees that as equitable enough to let 50-50 in $30k of investment income go by. 

However, I would guess that if one person was earning $200k and the spouse was earning $50k and the tax returns were showing a 50-50 split in $100k of investment income, that CRA would come calling for documentation to prove the case. 

CRA computers have algorithms to flag certain types of patterns for further review by a human and I doubt any one really can guess what those flags are and when they are triggered. I decided decades ago not to invite the possibility of our tax returns being flagged so I kept good records about whose money was invested where. Others may choose differently.