FP Answers: What are the tax implications of joint investment accounts?

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There are some benefits to keeping your assets together with your spouse, especially from a estate planning perspective

A joint account does not have to be stated immediately in your tax return. A joint account does not have to be stated immediately in your tax return. Photo by Getty Images/iStockphoto

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By Julie Cazzin with Andrew Dobson

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Q: I have a joint investment account with my wife Diane that she would have access to after my death. I only have another investment account in my name that holds my stocks and bonds. What are the tax consequences for that account in the event of my death? Would it be possible to convert that account into a joint account with my wife now? Are there any tax consequences if that happens? — Raymond in Picton, Ont.

FP Answers: Raymond, an investment account that is solely in your name, can be transferred to your wife on a tax-deferred basis upon your death. In general, unrealized capital gains would not be generated from the death of a spouse, and the assets would be transferred to the surviving spouse at their adjusted cost basis. The tax-deferred transfer can happen if you hold the account together or if your spouse is a beneficiary of your will.

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Your executor may also choose to have a portion of the capital gains taxed in your tax return if it is beneficial. This may be the case, for example, if you have tax deductions or tax credits that you have to use up, or if you have a relatively low income in the year of your death. However, the standard is that capital assets such as stocks, mutual funds, exchange-traded funds, real estate and similar assets are transferred to the surviving spouse at cost.

During your lifetime, you should consider the income allocation rule when transferring money between spouses, including adding them as joint account holders. The imputation rule prevents a high-income spouse from donating cash or other assets to a low-income spouse to pay less tax on future income.

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If you add your spouse’s name to a joint investment account with the intention of splitting the income between your two tax returns, that income may be taxable to you under attribution rules. This income includes income from investments, such as interest, dividends and realized capital gains.

While the imputation rule limits a potential tax benefit of splitting income, it doesn’t mean you can’t create a joint account for estate planning purposes. You can add your spouse to your unregistered account, giving them legal ownership interest in the assets, but no beneficial ownership for tax purposes. You could continue to declare 100 percent of the income on your tax return, even if the account is converted to a joint account.

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If you and your wife both have individual unregistered bank or investment accounts, consider creating joint accounts for them all. From a tracking and administration standpoint, you could be the “primary” account holder for any account that is yours for tax purposes. For example, you could add your wife (say her name is Debra) to your brokerage account, and the account would list Raymond and Debra on its statements and tax slips. If Debra has a savings account in her name, you could convert it into a joint account between Debra and Raymond, with her name first. For economic ownership and therefore tax purposes, you state 100 percent of the income on the declaration of the first account holder.

A joint account does not have to be stated immediately in your tax return. Technically, if you’ve made unequal contributions to the account, for example, 75 percent of the account could be given up by one spouse and 25 percent by the other.

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There are several potential benefits of keeping all assets together, including easier management of the assets over your lifetime, especially as you get older. Joint ownership also generally gives immediate access to funds when a spouse dies. Otherwise, an account can be frozen while the executor is settling the estate, typically incurring legal, probate and other administrative costs.

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As for ease of access, a financial institution will generally transfer joint investment and bank accounts in the surviving spouse’s name after providing a copy of a death certificate. For individual accounts, funds may not be accessible for several months, depending on the estate settlement process.

Legacy fees vary by province. Some counties charge low flat fees, while others charge a percentage based on the total value of the deceased’s estate. Joint ownership of an asset can bypass the probate process as ownership would pass directly to the survivor.

Some accounts, such as registered retirement savings plans and tax-exempt savings accounts, cannot be held jointly. But these accounts can prevent probate by naming a beneficiary or successor, such as your spouse.

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In short, Raymond, there may be immediate tax considerations in adding your wife’s name to your investment account. But there are some benefits to keeping your assets together with your spouse, especially from a estate planning standpoint.

Andrew Dobson is a Certified Financial Planner (CFP) and Chartered Investment Manager (CIM) at Objective Financial Partners Inc.

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