Ask MoneySense
What are the advantages if a husband buys stocks or other investments in his wife’s name? He earns income and she has never worked.
—Lynne
How income-splitting with a lower-income spouse works
It is possible for one spouse to hold investments in the other spouse’s name, but the tax outcome depends on the account type and how money is contributed. Below are common scenarios and practical considerations for couples who want to shift investment ownership or income to a lower-earning partner.
1. Contributing to an RRSP
If a husband gives his wife money to contribute to a registered retirement savings plan (RRSP), there are usually no immediate tax consequences for the transfer itself. However, RRSP contribution room is generated by earned income (employment or self-employment), so someone who has never worked may not have any RRSP room to use. Even if she does have room, claiming an RRSP deduction while having little or no taxable income provides little benefit because there is little tax to offset.
2. Contributing to a spousal RRSP
A more effective strategy for tax planning may be a spousal RRSP. With this approach, the higher-earning spouse contributes using his own RRSP room and claims the deduction on his tax return, while the account is registered in the lower-income spouse’s name. Withdrawals from that spousal RRSP are taxable to the account holder — the wife — which can help smooth and reduce total household tax in retirement if their incomes are more balanced.
Be mindful of attribution rules: if the contributing spouse makes a deposit and the spouse-owner withdraws funds in the same year or within the following two years, the withdrawal may be attributed back to the contributor and taxed on his return. Converting a spousal RRSP to a spousal RRIF and taking only the minimum withdrawal can exempt some amounts from attribution under specific conditions.
Also note that if RRSP savings remain solely in the husband’s name, income-splitting at withdrawal is possible in limited circumstances—such as converting to a registered retirement income fund (RRIF) and sharing up to 50% of the withdrawals—typically available once the owner reaches retirement age thresholds defined by pension rules.
3. Contributing to a TFSA
Contributions to a Tax-Free Savings Account (TFSA) held in the spouse’s name are simple and generally tax-neutral. TFSA contribution room accumulates regardless of earned income, and investment returns inside a TFSA are tax-free and not subject to attribution between spouses. For many couples, maximizing both partners’ TFSA contributions is a priority before turning to taxable, non-registered investments.
4. Contributing to a non-registered account using a spousal loan
Placing money into a non-registered account in the spouse’s name can trigger attribution: the investment income will usually be taxed back to the higher-income spouse. The standard way to avoid attribution is a prescribed-rate spousal loan. Under this arrangement the higher-earning spouse loans money to the lower-earning spouse at the Canada Revenue Agency’s prescribed rate. The borrower pays interest to the lender and may be able to deduct interest as a carrying charge against investment income, while investment returns above the interest cost remain taxable to the borrower.
Because the prescribed rate creates a minimum cost (for example, 5% at certain times), it may be difficult to earn a net return above that threshold after fees and taxes. The interest paid is taxable to the lender, so the net household benefit depends on the returns the borrower can generate and each partner’s tax brackets. If the couple does not use a prescribed-rate loan, investment income generally becomes taxable to the original source of funds through attribution rules. One limited exception: once attributed income is paid out and reinvested by the spouse, subsequent returns on that reinvested amount — second-generation income — will be taxable to the spouse who now holds the asset.
Engage both spouses in investing
Beyond tax mechanics, there are practical advantages to holding assets in both partners’ names. When both spouses participate in investing decisions, it provides mutual oversight and reduces the risk of one partner making unilateral, risky choices. Additionally, one spouse will eventually be required to manage finances alone — because of death, incapacity, or separation — so it makes sense for both partners to be familiar with their investment strategy.
Which approach is best?
The right method depends on your goals, current tax positions and account types. Putting money into an RRSP or TFSA in the lower-income spouse’s name can be tax-neutral or advantageous, especially with a spousal RRSP for retirement income-splitting, provided attribution rules are observed. Investing in non-registered accounts for a lower-income spouse requires care to avoid attribution unless a prescribed-rate loan is used or the strategy relies on second-generation income. Couples should consider both tax consequences and the broader benefit of joint involvement in financial planning.
Read more from Jason Heath:
- How spouses with joint accounts should claim capital losses
- Planning for retirement with little or no savings to draw on
- Are spousal and child support payments taxable?
- Who to name as executor when family members aren’t an option