Your situation sounds complicated, but most likely the SM is better claimed in your wife’s name only, because you are getting dividends.

With the tax-efficient version of the SM, you would claim it on your return to get the refunds. With the dividend version of the SM, you would normally claim it under your wife’s name in order to pay less tax on the investment income. This depends on how much you receive in dividends vs. the loan interest.

With the dividend version of the SM, you normally don’t get the refunds that you get with the tax-efficient version.

By “overseas tax credit”, I assume you mean you are taxed in a different country – is that right? Which country?

It may sound complicated, but essentially you claim your foreign income in that country and pay tax there. Then you also claim it on your Canadian return, but claim a tax credit for the tax you paid in the other country.

This mean you essentially pay the highest rate of the 2 countries, which is probably Canada.

Without know the details of your situation, if your employment income is fully taxed in Canada, then your tax bracket is much higher than your wife’s. Her gross may be $50-60,000, but what is the income she actually shows on her tax return after business expenses? She is probably in the low tax bracket, while you are probably in a high tax bracket.

Your accountant may be claiming the SM under your wife, because you are using a dividend method. Dividends are taxed at negative tax rates (no tax) for the lowest tax bracket (taxable income under $41K).

Both the investment income and the interest deduction need to be claimed by the same person(s).

The SM is usually best claimed on the person with the highest income. If you invest in a tax-efficient investment (one with minimal taxable investment income), you should be getting tax refunds every year. The interest deduction should be more than the investment income almost every year, so you get tax refunds. In that case, you would claim the SM on your tax return.

Ed

Dwight.

I just noticed your post. That is partly right. Whoever borrowed to invest should claim both the interest deduction and the investment capital gains. That is normally designated when you first borrow to invest (or the first time you prepare your tax return).

In general, once you designate who borrowed to invest, that should remain as long as you have the investment loan.

You should then consider that person paid the interest. That is normally a reasonable assumption, as long as he/she made at least that much. If you decide to claim it 50/50, then both need to earn at least that amount of income each year.

The example in the article was not a smart tax strategy anyway. If she has no income and he has a high income, it would be much smarter for them to claim everything on his return only.

Ed

I just noticed this post. Elman is correct – whoever claims the interest deduction must also claim any investment income/profit.

Since you are in the higher tax bracket and assuming you plan to invest tax-effiiciently, you should expect tax refunds most years. Therefore, you would want to claim both the interest deduction and the investment income/profit.

Your position is that you borrowed money and invested it, which is why you claim all the tax consequences. Your investment credit line is probably in both your names, but that does not matter. You can also buy the investments in joint names with your wife for estate planning purposes, but still have claim everything yourself.

Ed

[...] Which Spouse Should Claim the Investment Loan?  [...]

The reason we usually put the investments in joint name is for estate planning purposes – joint with right of survivorship.

The legal and tax ownership of investments can be different. For example, the entire section on attribution rules is about investments in one person’s name but the income is taxed back to someone else.

So, we can have the investments in joint name and then can have both the loan interest deduction and the tax on the investment income taxed to either or both, whichever is best.

However, you should not change it after that. If for example you have the entire SM taxed to the husband and things change so it would be better to have it all taxed to the wife, the only way to do this is to sell the investments and pay off the loan – and then reborrow and rebuy.

Therefore, our choice of which spouse to tax to (or joint) is based on which we expect will be best for most of their financial future. It is a many year decision – not a one year decision.

Ed

Would you explain your thinking behind putting the investments in Joint name and then claiming the deduction and interest wherever it is best. Are you suggesting that you would change who claims the deduction based on their annual taxable income. If so, would that be an issue with CCRA?

The key in determining who should claim the SM should be in who should best claim the interest deduction.

If your investments are tax-efficient, you should be able to keep your taxable income far below the interest tax deduction for many years.

You are right that you should look at the long term incomes. Once you start claiming the deductions and income on one person’s tax return, you need to continue, unless you sell and claim the taxable gains to date.

FT, the tax ownership of the SM can be different from the names registered for the investements or the investment credit line. This takes some explaining, but the short answer is that we always have both the investments and the investment credit line in joint names, but then claim the deduction and interest wherever it is best.

Ed

Telly, I would need to do an analysis on receiving dividends and the optimal tax solution. But as you stated, it would depend on income of both spouses and the province that they live in. Cannon Fodder’s spreadsheet may help in determining the outcome.

FT, is this hands down always the case? I wonder, if investing in buy-and-hold dividend paying stocks (no cap gains), would it always make sense to invest in the higher income earners name? I’m wondering if dividend gross-up (depending on the province) might make the opposite more appropriate depending on the income levels of each spouse. I don’t have any numerical examples (I’m too lazy ;)) though.

I do my leveraged buying with a home equity secured line of credit (FirstLine Matrix) – not sure if that is what you mean by a “regular” LOC.

This is good information. I think I might have made an error with some of my leveraged buying because some of it ended up getting mixed in with my regular mortgage which is locked in for several years. What happened was that I made a purchase with my LOC at my old bank – then I transferred the mortage + LOC to new financial institution and put it all together in the locked in mortgage (at a good rate). Co-mingling probably doesn’t help if I get audited but I figure that since I have the paper trail I should be ok.

Mike