When you give cash or assets to a family member to invest, there may be attribution of that income back to you. Attribution causes income to be taxed on the original taxpayer’s income tax return. Attribution applies:
- Between spouses. So, if a high-income spouse gives money to their low-income spouse to invest, with the goal of reducing their tax payable, the attribution rules apply.
- To some income between a parent and a minor child. Interest and dividends are taxable back to the parent, but capital gains are taxable to the child. So, you can accomplish some income splitting with a minor child.
Attribution does not apply between a parent and an adult child, unless the funds are loaned to the adult child at a low interest rate or at no interest rate. In the case of a low- or no-interest loan, where it seems the intention is not to truly gift the money, but to reduce tax payable on the income for a period of time, there is attribution. As with a minor child, it applies to interest and dividends, but not capital gains.
Can you avoid capital gains tax by gifting an asset?
When an asset is outright gifted to a child, there’s a deemed disposition. The asset is considered to be sold to the child at the fair market value, and any accrued capital gains become taxable. So, you cannot avoid tax by gifting an asset, like a cottage, for one dollar, for example.
It does not appear you have made a gift to your son, Jing. You intend to continue to report the income. So, there is no capital gain and there is no attribution. You should just continue to report the income on your tax return.
Legal ownership vs beneficial ownership
This is a case where legal ownership—whose name is on an asset—does not match the beneficial ownership—who technically owns the asset. Legally, the account is joint. Beneficially, the account belongs to you.
This creates tax consequences for you that may be unintended. Trust rules have changed for 2023 and future tax years. If you have an account, like your brokerage account, Jing, where the legal and beneficial ownership are different, you need to file a special tax return.
New trust reporting rules for 2023
A T3 Trust Income Tax and Information Return is used by trusts to report trust income as well as information about the settlor, trustees and beneficiaries of the trust. Although you may not have established a trust with a lawyer, or even consider this joint account to be a trust, the Canada Revenue Agency (CRA) considers it a trust.
The CRA makes an exception for “trusts that hold less than $50,000 in assets throughout the taxation year (provided that the holdings are confined to deposits, government debt obligations and listed securities).”