Oh Great CP brain trust, I have a taxes question for you.
So for the first ever, we used money to make money and now we have to report capital gains for our taxes this year. My question here is that who reports the income on our investment?
If we split it 50/50 I get bumped into the next tax bracket and we pay more. If my wife can somehow claim it all, she still stays in her current tax bracket. Is it possible for my wife to claim all of the gains on the investment.
if it's a joint account you have to split it based on who contributed the income to the account. So if it was all your wife's money then yes she can claim it all, but if it was all your money you are required to claim it all.
then she gets the gains. Good news for you by the sounds of it!
EDIT: I should add that I'm not an accountant, but an investment advisor....just so you know!
Nope.
It's determined by who contributed the funds. If the money was 50-50 then the gains can be split. If the money is the higher-income spouse's, that person must claim the gains. If you think about it, would it make sense that someone in a high tax bracket could just give money to a spouse in a low bracket to avoid taxes, well it makes no sense.
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Isn't there a one time gift that can be given to avoid capital gains tax like this or is that an old law (or one I misunderstand)
No, capital gains from a gift to spouse work as follows. If you give money to a spouse, first-generation income attributes back to you. Second-generation income (income on income already earned) doesn't attribute. There is no such free capital gain on a gift.
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Isn't there a one time gift that can be given to avoid capital gains tax like this or is that an old law (or one I misunderstand)
I'm guessing you're thinking of the lifetime capital gains exemption which was in effect at one point in time for all capital gains; now it can only be used against capital gains that result from the sale of qualified small business shares, farming property or fishing property.
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I'm guessing you're thinking of the lifetime capital gains exemption which was in effect at one point in time for all capital gains; now it can only be used against capital gains that result from the sale of qualified small business shares, farming property or fishing property.
That is what I was thinking of, but I do think it was tainted by the Shawshank scene!
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It's determined by who contributed the funds. If the money was 50-50 then the gains can be split. If the money is the higher-income spouse's, that person must claim the gains. If you think about it, would it make sense that someone in a high tax bracket could just give money to a spouse in a low bracket to avoid taxes, well it makes no sense.
Right: attribution! I guess the way around this is to have the higher income spouse lend the money to the lower income spouse.
Yup, attribution is the key here, doesn't matter whose name was on the account it matters whose money made the investment. Just be honest about it and you'll be fine. Capital gains are only taxed a 50% of the gain anyway, so your already getting a good deal. If you lie and the CRA gets you the penalties are not worth the minimal savings now.
Additionally, it sounds like you might have some old capital losses (just guessing by the tone of the OP). You can carry those losses forward to reduce these cap gains. Check your notice of assesment to see if you have some carryover. This assumes you've reported your capital losses in prior years.
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ok, let's complicate matters further, let's say the original investment sum was a loan to my spouse from her mom. The gains were used to pay back the loan, but we kept the profits. Based on what moneyguy said, I would assume that the original income would still be under my wife even though the money was originally from another source.
^In that case the gains are for your wife. She has to have a paper trail showing that she paid interest and then that interest can be written off for her as well.
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ok, let's complicate matters further, let's say the original investment sum was a loan to my spouse from her mom. The gains were used to pay back the loan, but we kept the profits. Based on what moneyguy said, I would assume that the original income would still be under my wife even though the money was originally from another source.
Thanks to all for the help.
Loans by related parties for purposes of investment are fine. You can deduct the interest paid on the loan, but the lender (wife's mom) has to claim the interest on her tax return.
You can't just not charge interest either. There is a prescribed rate that is has to be charged at.
Right: attribution! I guess the way around this is to have the higher income spouse lend the money to the lower income spouse.
Yes, and the prescribed rate that must be charged that is reviewed quarterly is only 1% so this is a very reasonable strategy. However, you actually have to charge the interest and it must be paid by Jan. 30 of the following year otherwise this strategy fails. You must have a signed agreement obligating both parties. Edit: I see this has been discussed already.
Capital Gains and Your Spouse
