Q: Is there a way for me to transfer my mutual funds to my spouse so that we can use the money for an investment?
A: When capital assets like mutual funds, stocks, exchange-traded funds (ETFs) or rental real estate are transferred from one spouse to the other, by default, the transfer takes place at that asset’s adjusted cost base (ACB).
Specifically, if you own mutual funds you bought for $10,000, Dean, and you transfer them to your spouse when they’re worth $15,000, your spouse’s cost for capital gains tax purposes is still the initial $10,000 at which you acquired the investment.
That said, it doesn’t mean you’ve successfully transferred the capital gain over to your spouse to realize in the future instead of you. A transfer of capital assets leads to attribution between spouses, such that any subsequent income – whether dividends, interest, capital gains, or other income – are taxable back to you.
In other words, if the mutual fund generates $500 in taxable dividend income after it is transferred, that income is taxable on your tax return, not that of your spouse. And if your spouse then sells the mutual fund for $16,000, the $6,000 capital gain is also taxable to you based on the original $10,000 cost.
You can elect to have a transfer between spouses take place at a value between the adjusted cost base and the current fair market value (FMV), and in some instances this may make sense.
There are a few ways to avoid attribution of income earned after a transfer as well, Dean. If you transfer an investment or cash into your spouse’s Registered Retirement Savings Plan (RRSP) or Tax Free Savings Account (TFSA), neither the subsequent income nor the subsequent withdrawals are taxable back to you (one exception discussed later).
If you transfer an investment with a deferred capital gain into your spouse’s RRSP or TFSA, Dean, it is considered a deemed disposition and triggers the capital gain for you at the time of transfer, to be taxed on your tax return. Of note is that if you transfer an investment with a deferred capital loss into an RRSP or TFSA, that loss is not eligible to claim, so you should consider selling the investment to trigger the capital loss first.
And if you contribute to a spousal RRSP – an RRSP in your spouse’s name that you contribute to, you claim a deduct for, and they eventually withdraw from – there may be attribution. If your spouse takes withdrawals within 3 years of you contributing, the RRSP income can be attributed back to you.
If your goal, Dean is to transfer non-registered mutual funds to your spouse to generate the subsequent income in their name instead of yours, you may be able to do so by way of a spousal loan. If you loan money to your spouse, they can have the subsequent income taxed in their name instead of yours. There is a minimum prescribed interest rate you need to charge, currently 2 per cent, for the spousal loan to be legitimate. This prescribed rate is announced each quarter.
So, if you loaned $10,000 to your spouse, you would have to charge them 2 per cent or $200 per year in interest for the income generated to be taxed on your spouse’s tax return instead of yours.
The interest paid to you by your spouse would be tax deductible to them and taxable to you. And to the extent they can earn more than a 2 per cent annual return, you will have effectively moved the excess income over and above the 2 per cent from your tax return to theirs.
The same attribution of deferred capital gains applies even if you loan the money, so if you have deferred capital gains on a mutual fund you wish to use to fund the spousal loan, you may wish to sell it first and transfer the cash proceeds, or alternatively elect on your tax return, Dean, to have the transfer take place at fair market value.
If the dollar value of the spousal loan is substantial, especially if you have children or grandchildren with whom you can also split income in addition to your spouse, you may even consider a loan to a discretionary family trust.
As trustee of a family trust, you can manage investments on behalf of family member beneficiaries and distribute the future income and capital gains directly to them or pay for expenses on their behalf (child care, sports, activities, etc. for a child or grandchild, for example).
For the legal and accounting costs of a formal family trust to be justified, you might need to have hundreds of thousands of non-registered dollars to be invested though. Family trusts are complex and require professional input.
In summary, Dean, there are lots of different ways to transfer money to an account in your spouse’s name. Which account is best and the resulting tax implications are important considerations that should be part of your overall financial plan.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.