Couples Who Borrow to Invest Need to Mind Tax Guidelines

Here’s a common issue encountered by tax and financial advisors. The client is Mr. X who has borrowed money to invest and wants to write off the interest. Can the investments be held jointly with his wife, Mrs. X for estate and tax planning purposes? What are the pitfalls to consider?

Knowledge Bureau’s  Research Department looked to EverGreen Explanatory Notes for a quick reference to answer this question. Particularly helpful is the auto-link to CRA’s IT 533, relating to the requirement to tracing the use of funds.

Advisors and their clients need to be particularly aware of the Attribution Rules in this case, as well. The rules are as follows: the taxpayer who provides the capital for the investment must report the investment income – in this case Mr. X who  is borrowing and so the income earned will be his, no matter whose name the investment is made in. Any interest paid on money borrowed to earn investment income will be deductible against that income. Therefore, his cost of borrowing will be deductible against the income he reports.

The investment may be in both names for estate planning purposes, but that does not change the tax filing requirements. The SIN reflected on the investment must be Mr. X’s.