Can a Joint Investment Account With Your Child Lower Your Taxes?

Tax implications of jointly owning an investment account with your child

Before answering your question, Jing, here is a brief overview of income attribution rules that affect family transfers and investments.

When you give money or assets to a family member for investment, income attribution rules can cause investment income to be taxed on the original owner’s tax return. Attribution typically applies in these situations:

• Between spouses — if one spouse gives money to the other to invest, the income may be attributed back to the original spouse.
• Between a parent and a minor child — interest and dividends paid from investments funded by a parent are generally taxed back to the parent, while capital gains are typically taxed to the child.

Attribution generally does not apply between a parent and an adult child, unless the money was provided as a low- or no-interest loan. In that case, the Canada Revenue Agency treats the arrangement as if the parent intended to retain an economic benefit, and attribution rules can apply to interest and dividends (but not capital gains), as with minor children.

What happens if you gift an asset instead of keeping it in a joint account?

If you outright gift an asset to a child, Canadian tax rules treat that transfer as a deemed disposition at fair market value. Any accrued capital gains up to that value become taxable at the time of the gift. So you cannot avoid capital gains tax by giving away an asset — transferring a cottage or other property for a nominal amount will trigger tax on gains.

In your case, Jing, it appears you did not make an outright gift. You intend to continue reporting the income from the investments yourself, so there is no deemed capital gain from a gift and, accordingly, no attribution in the usual sense. You should continue to report the income on your tax return.

Legal ownership versus beneficial ownership

Here the distinction between legal ownership (whose name appears on the account) and beneficial ownership (who actually owns the asset) matters. Legally the account is joint; beneficially you say the assets remain yours.

That mismatch can have important tax and reporting consequences. Recent changes to trust reporting rules mean the Canada Revenue Agency may view arrangements where legal and beneficial ownership differ as trust-like relationships that require additional reporting.

New trust reporting rules starting in 2023

The CRA uses the T3 Trust Income Tax and Information Return to collect information about trusts, including details about settlors, trustees and beneficiaries. Even if you didn’t set up a formal trust agreement or consult a lawyer, the CRA may consider a joint account with differing legal and beneficial ownership to be a trust for reporting purposes.

There is a small-exemption threshold for trusts that hold less than $50,000 throughout the taxation year, provided holdings are limited to deposits, government debt obligations and listed securities. Otherwise, the new reporting rules could apply.

It’s also important to remember that a deemed disposition can occur on death: investments are reported at their fair market value on the date of death, which can trigger capital gains and tax liability for the estate.

Will joint ownership avoid probate fees?

Joint ownership is often used in attempts to reduce probate or estate administration fees, but it doesn’t reliably accomplish that and can create complications. Provincial rules vary, so you should get legal advice in your province or territory. For example, Ontario’s estate guidance directs executors to include property in which the deceased had a beneficial interest even if legal title was held by someone else.

Joint ownership with a child can inadvertently expose your assets to your child’s financial risks. Even if you trust your son, consider scenarios such as disability, divorce, lawsuits or creditor claims that could affect the jointly held assets. These events could compromise your access to or control over the funds.

Risks and alternatives to joint ownership

Joint ownership with a child involves trade-offs: you may gain convenience, but you could face no tax advantage, potential extra reporting and additional legal exposure. There may also be added costs related to filing trust returns or other disclosures.

An alternative is to grant a power of attorney to your son so he can assist with managing accounts without changing legal ownership. That approach keeps beneficial ownership clear, limits exposure to your child’s personal circumstances, and lets you define replacements or limits should your son be unable to act in the future.

Read more about joint accounts:

• Should you consider using joint accounts to avoid probate?
• Video: Five things to know about joint bank accounts
• How spouses with joint accounts should claim capital losses
• What is joint tenancy?