The article “How spouses with joint accounts should claim capital losses” was originally published in MoneySense on November 15, 2022. Photo by Yan Krukov from Pexels.
A couple with a pair of joint accounts wants to claim a capital loss on their taxes. How should the loss be reported, and do they risk having the claim denied?
“We have two joint non-registered accounts set up, one for me and one for my wife. I’ve been tracking adjusted cost bases and combined we have about a $15k tax loss. I haven’t calculated those separately for each account.
Should I decide to sell and take the loss, I would repurchase a similar security (sell VGRO and buy XGRO). My understanding is that because these track different indices, it’s kosher with CRA.
My question is related to the tax loss. Is it calculated with CRA separately for my wife and I or is it combined?” Andrew
Reporting capital losses as spouses with joint accounts
One thing you will have to consider, Andrew, is if the two joint non-registered accounts are actually joint accounts or if one belongs to you and one to your wife. Sometimes, spouses will have separate accounts for tax purposes, and they make them joint accounts in name only for administrative and estate planning purposes.
The reason for this is the distinction between legal and beneficial ownership. Legal ownership is whose name is on an account or asset. Beneficial ownership is who technically owns it. If you have a joint account that is funded by only one spouse’s earnings, the account could be joint legally, but beneficially only belong to the contributor spouse for tax purposes.
Some spouses will identify whose account it is by whose name is listed first. For example, Andrew and Andrea’s account would be Andrew’s for tax purposes, and Andrea and Andrew’s account would be Andrea’s.
When an account is legally joint, either spouse can access and trade on the account, and if one of the spouses dies, it passes directly to the survivor. So, administratively, joint ownership has benefits, but you can and should report the income based on the respective contributions of the spouses.
If one account is beneficially yours and one account is beneficially your wife’s, Andrew, any losses triggered should be reported by the spouse who realizes the capital loss. And if the joint accounts are split 50/50, you and your wife should report any losses as 50/50. A common mistake is thinking you can choose whose tax return to move the losses to, but it does not work that way.
Presumably, the two of you have reported investment income in the past as well, so any further gains and losses would generally be reported in the same allocations as the previous income.
When you have a combined adjusted cost base
If the two accounts are true joint accounts for tax purposes and you own any of the same securities in both accounts, you need to determine your combined adjusted cost base.
For example, say you bought $20,000 of Vanguard Growth ETF Portfolio (VGRO) in one account and $10,000 in the other. And then you sell the VGRO units in the second account. You should determine your adjusted cost base on all units of VGRO in both accounts when determining the capital gain or loss. It would not just be based on the purchase price in the account where you sold VGRO.
Avoid creating a superficial loss
You ask about selling VGRO and buying XGRO (iShares Core Growth ETF). I suspect this is because you are aware of the superficial loss rule. If you sell VGRO for a capital loss and then repurchase it—because you like the ETF but just want to trigger the loss—the loss could be denied. This happens when you sell a security and repurchase it within 30 days. It is as if you had not sold the security at all.
How to report a capital loss
When you trigger a capital loss in a non-registered investment account, the loss is deductible for tax purposes. Capital losses in tax-deferred or tax-free accounts like registered retirement savings plans (RRSPs) or tax-free savings accounts (TFSAs) are not deductible.
A capital loss can be deducted against capital gains realized in the same year. If you have more losses than gains in a year, you can “carry” the remaining losses back to offset capital gains realized up to three years previous. This can trigger a tax refund for a previous tax year. You can also carry losses forward to claim against future capital gains. Capital losses can be carried forward indefinitely.
Be careful when tax-loss selling
A lot of investors will be engaging in year-end tax-loss selling, Andrew. People should be careful not to inadvertently realize a superficial loss by repurchasing within 30 days any investments they sell at a loss. Spouses should do their best to minimize the amount of tax paid, but they cannot pick and choose how to allocate losses between them. Income and losses should be based on the proportionate contributions to an account.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.