The right way to report shared investment income on a tax return


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Q. I have a join investment account with my partner and, as required, we each report earnings from the account on our annual tax returns, based on the ratio of our contributions to the account. But what should we do if future contributions should change the ratio in our joint investment account—do we recalculate our reporting ratio whenever this happens? I have heard that CRA may audit any accounts that appear to be making changes for optimal tax splitting outcomes, and would like to avoid an audit by handling this in the correct way.
–Maura

A. Hi Maura. Typically when you have a joint investment account, the reporting ratio stays the same over time on the theory that the ratio of subsequent income deposits is the same as the original contribution from each of the parties to the joint account. So when people change the reporting ratio, it’s a red flag to CRA.

As a result, these are frequent areas that CRA likes to audit, but don’t let that worry you. If your proportionate income deposits are changing, then the reporting ratio should change and CRA will accept this—with the relevant proof, of course.

Make sure you keep all copies of your income deposits to the account. An accountant can be helpful if there is a query from CRA, if they have been authorized on the Represent a Client portal with CRA. They can field the inquiry and request that the CRA add a note to your file that provides an explanation for the changing ratios.

To completely eliminate the chance of an audit, you might consider setting up a new joint account each year with the relevant ratio for that account, and that won’t change from year to year as you continue to hold that investment in your portfolio; or separate your accounts so that each account is at 100% ownership.

Theresa Morley, CAP, CA, is a partner with Morley Chartered Accountants in Barrie, Ont. She blogs at MorleyCPA.

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