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My wife and I are joint owners WROS (with right of survivorship) of a stock we have owned for many years. If the ownership of the stock is changed to just her name, individually, no death involved, does her cost basis of the shares remain the same as it was when it was in our joint names? —Joe
When taxpayers own an asset, they may need to consider the difference between legal and beneficial ownership. When an asset is in someone’s name, they may have legal ownership of the asset, but that does not necessarily mean they have beneficial ownership. Beneficial ownership is based on who the true owner of the asset is, including for income tax purposes.
If you and your wife contributed equally to the original purchase of the stock, Joe, you may both be legal and beneficial owners. If only one of you contributed to its purchase but you simply opted for joint ownership originally, one of you may be the true beneficial owner.
I will assume that you both contributed equally and have reported the dividends, if any, equally over the years since your original purchase. In other words, you are both equal legal and beneficial owners.
When spouses transfer capital assets like stocks between them, during life or upon death, the transfer takes place at the asset’s adjusted cost base. For a stock, that will be the original purchase price or the total of the cumulative purchases and any other relevant adjustments. As a result, no capital gain takes place on transfer.
However, you can elect to have the transfer take place at a value between the adjusted cost base and the fair market value. There may be a reason to do this to trigger a capital gain, including if you have net capital losses from previous tax years carried forward, Joe.
If half the value of the shares is beneficially yours, half the future dividends and capital gains on sale should be taxed to you after a transfer. This is a concept called attribution. When spouses gift or transfer assets between each other, subsequent income is attributed back to the transferring spouse. Attribution does not apply to assets received upon the death of a spouse.
If your primary motivation for making this transfer, Joe, is because your wife will pay less tax on the future income, the strategy may not work. That said, there may be other options to split income with a lower income spouse.
If a taxpayer lends money to their spouse and charges the prescribed rate of interest by the Canada Revenue Agency (CRA), the recipient spouse can report the future income. So, you could lend money to your wife to invest, and she could report the future income, if she did so after receiving a prescribed rate loan.
The current CRA-prescribed rate is 1%, but that rate is scheduled to increase to 2% on July 1, 2022. The prescribed rate of interest can stay in effect for the duration of the loan. Interest must be paid on the loan by January 30 of the subsequent year, including a prorated calculation of interest in the first year of the loan.
You would report the interest as income, Joe, and your wife could deduct the interest on her tax return as a carrying charge—or cost of investing. If the loan is at 1% and the future investment income is 5% per year, you could effectively transfer $4,000 of income to your wife on a $100,000 loan.
If you and your wife have unused room in a tax-free savings account (TFSA), it may be worth selling the stock or transferring it to your TFSAs. A transfer of a non-registered stock to a TFSA triggers a capital gain as if you sold it. Despite the tax hit, it may be worth it to have future dividends and capital gains tax-free in your TFSAs.
There is no attribution of income if a taxpayer is using cash or stock to contribute to their spouse’s TFSA or registered retirement savings plan (RRSP).
So, can you transfer your share of the stock to your wife without triggering a capital gain? Sure, you can, Joe. But future income may be attributed back to you. A strategy like a spousal loan may help, but only if you have a significant amount of money to lend your wife to invest.
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.