The article “FP Answers: Can opening a joint investment account with my teenager reduce my taxes?” was originally published in Financial Post on June 9, 2023, By Julie Cazzin with Andrew Dobson.
Putting investments in his name just to save tax and then using the money as if it were your own may be offside.
Q: After 30 years of being a DIY investor, I have built up a $1.5-million stock portfolio by reinvesting the dividends for many years. If I open a joint account with my son Lenny, who is 19 years old, and he receives the dividends in cash, who pays the tax? Is this a good way to reduce taxes in our household? If not, can you recommend a better option? — Thanks, Nicholas P.
FP Answers: To understand the potential benefits of income splitting in this case, we should first review the income attribution rules, which discourage income splitting to avoid paying higher taxes. However, there is no income attribution on gifts to adult children, which means that if you give money to an adult child to invest, any income earned would be taxable to that child, not back to you.
By comparison, income earned on money gifted to a minor child is attributed back to a parent. That is, the income is taxable to a parent. However, capital gains are not considered income in this case, just dividends and interest from investments.
If you gave your son money to invest, your family may be able to save tax if his tax rate is lower than yours. It would need to be an outright gift, though. Putting investments in his name just to save tax and then using the money as if it were your own may be offside.
It also bears consideration, Nicholas, that gifting some of your existing investments to your son may trigger capital gains tax if you sell investments for a profit. Even if you gifted half the account to him and added his name jointly onto the existing account, deferred capital gains would be triggered. You would be considered to have sold half the investments — a deemed disposition — and this would trigger any accrued capital gains.
You could lose control over the money, though, and this would allow him to access 100 per cent of the investments as if he held them solely as his own. This could also expose your hard-earned savings to his creditors or to a family law dispute with a spouse or common-law partner.
If you wanted to put some money in your son’s name, but maintain full control over the capital amount, you could set up a discretionary family trust. This essentially protects the money from his unimpaired access because you would be the trustee in charge of the money, and be making the investment and distribution decisions. But a trust has costs. Upfront legal fees may be $5,000 or more, and annual accounting and legal fees could be $1,000 or more.
There may be an advantage to being joint owners on the investment account for estate-planning purposes. The assets in a joint account may be transferred to your son upon your death rather than forming part of your estate. That said, some or all of a jointly held account may be considered an estate asset for purposes of calculating the estate administration tax.
There are other opportunities for income splitting that may be much easier and less risky. For example, you can gift your son money to contribute to his tax-free savings account (TFSA). He will have started to accrue TFSA room as of the year he turned 18. You could also help him put money towards his registered retirement savings plan (RRSP) contributions, but this requires earned income to create RRSP room. You could even start funding a first home savings account.
All three accounts would be in his name, but would legitimately save tax for you and your family, while helping your son get a head start on building his own stock portfolio to follow in his father’s footsteps.
Andrew Dobson is a fee-only, advice-only certified financial planner and chartered investment manager at Objective Financial Partners Inc. in London, Ont. He does not sell any financial products whatsoever. He can be reached at adobson@objectivecfp.com.
