Wife inherited a sum of money - she then deposited into a new joint, non-registered investment account she holds with her husband. All funds in account originated solely from her inheritance.
For 2024 tax year, the account generated investment income and they received a T5 slip with both spouses’ names listed. The slips indicate a recipient type of “2” (Joint account).
Referencing ITA:
Transfers and loans to spouse or common-law partner
74.1(1) If an individual has transferred or lent property (otherwise than by an assignment of any portion of a retirement pension under section 65.1 of the Canada Pension Plan or a comparable provision of a provincial pension plan as defined in section 3 of that Act), either directly or indirectly, by means of a trust or by any other means whatever, to or for the benefit of a person who is the individual’s spouse or common-law partner or who has since become the individual’s spouse or common-law partner, any income or loss, as the case may be, of that person for a taxation year from the property or from property substituted therefor, that relates to the period in the year throughout which the individual is resident in Canada and that person is the individual’s spouse or common-law partner, is deemed to be income or a loss, as the case may be, of the individual for the year and not of that person.
My understanding is since the funds for the joint account were entirely the wife’s inheritance and were subsequently transferred for the benefit of the husband via the joint account, the attribution rules apply.
Conclusion:
The income generated from the account is deemed to belong to the wife, as the original source of the funds. Therefore, the total income from the T5 slip and other income in this account will be reported on the wife’s tax return.
Is this how others approach a tax situation like this?
But, I’d bet that if you file the T1s showing all of the investment income on the wife’s return and none on the husband’s, CRA’s slip matching program will (6 months later) re-assess the husband’s return because of the T5 that is on file with his SIN. They won’t bother removing the amount from the wife’s return. Then you (or your clients) will have to fight for another year or two to get CRA to correct the husband’s return to reflect the proper treatment per ITA.
I’d bet if you filed the T1s as per the existing T5s, CRA would happily accept them and never look at them again…
This is one of those could have, should have, would have situations, as long as we explain it in the first place, the ultimate decision is at the client’s hand. When the flipping rule kicked in, I explained to 2 clients who were friends, one listened and reported business income, the other didn’t, took a chance, and got audited, and charged penalties. Documentation is the key, clients always forget we mentioned it. They will try to blame you when things happen
You are correct in our busy days, we often mention things to clients but do not formally provide them with documentation for them to sign acknowledging they were informed.
However, anything in the Gray Area that the client chooses to do… I always grab a signature. Just something I learnt about 26 years ago when the firm I was at has a client with a mega meltdown.
It really is easy.. have a form letter drawn up on letter head with fill in the blanks and grab a pen when client is in front of you insisting you file as XXXX.
Each slip in the Non-Registered Account(s) Year-End Resource Package includes the husband’s recipient identification number (SIN). I will file according to the Income Tax Act and if the CRA raises any questions in the future, we can explain that everything was done in accordance with the law.
