Real Estate

Question about splitting rental income between spouses

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  • Sep 28th, 2018 9:30 am
[OP]
Sr. Member
May 23, 2017
591 posts
351 upvotes

Question about splitting rental income between spouses

Me and my fiance would like some tax advice regarding two rental properties (mainly about who should be claiming the rental income). In case it is relevant: we currently live together but are not common-law (i.e. have not lived together for over a year); we are not married yet but will be in a few months; we currently keep separate bank accounts but will likely be getting joint accounts after we get married.

Rental property #1: this is currently a rental property under my name only (so obviously I claim all the rental income). I plan to add my fiance's name to the deed soon. Ideally, because my fiance is currently in a lower tax bracket, I would like him to be able to claim as much of the rental income as possible (instead of me). How should we structure this so that it is legit for CRA? Would he be able to claim 50% of the income right away after his name is added, or do I still need to claim 100% because I was the one who initially bought the house? What about if he gave me money to "buy out" part of the house? Does it make a difference whether we do this before or after getting married/getting joint bank accounts (not sure if CRA disallows house "buyouts" between spouses)? If he gave me 100% of the equity I have built so far in the house, would he then be able to claim 100% of the rental income (even though my name is still on the deed/mortgage)?

Rental property #2: this is a new purchase that we are buying together (closing in 1 month, both our names on the purchase agreement and mortgage). 100% of the downpayment and closing costs will be coming from my fiance's bank account. 100% of the costs after close (including mortgage payments, property tax, renovation/maintenance costs, etc) will be coming out of my LOC (all tax deductions from the interest on the LOC will be claimed under my name). How should we split the rental income? Can we attribute 100% of the rental income to my spouse since he is the one contributing all the money initially? (I will not be putting in any of my own money, just my LOC funds.) Alternatvely, if this is not allowed by the CRA, we are also considering having all after-closing costs come out of my fiance's LOC instead of mine--if we do this instead, would it then be acceptable for him to claim 100% of the rental income?

Thanks!
9 replies
Deal Fanatic
Feb 22, 2011
6890 posts
6996 upvotes
Toronto
Not in tax but as far as I am aware rental income goes in proportion to ownership. If you own 100% you get all the income, if you own 50% you get 50% of the income. I really wouldn't mess around with it, that is just begging for an audit.
Newbie
Mar 30, 2016
72 posts
45 upvotes
Yes this is correct in 99% of the time. Its even more difficult to adjust when you're looking at a spousal relationship since its hard to argue that one individual is paying more equity vs a situation with 2 individual partners.
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Deal Addict
Aug 30, 2011
3445 posts
1203 upvotes
Ottawa
rjg4235 wrote: Not in tax but as far as I am aware rental income goes in proportion to ownership. If you own 100% you get all the income, if you own 50% you get 50% of the income. I really wouldn't mess around with it, that is just begging for an audit.
^ this. Adding a name to title does not change how the income is taxed. "Owning" being defined as $$ contribution.
Deal Fanatic
Jul 4, 2004
5363 posts
1434 upvotes
Ottawa
FWIW, our accountant has always split rental income 50-50 between my wife and I. I'm guessing they are in both our names but I'm not even 100% sure (the first one was in my name only originally). As far as contribution, my salary is significantly more than hers but it's never been an issue (I think I've owned one of them for about 15 (I don't actually remember when I bought it)).
Member
Oct 26, 2007
280 posts
159 upvotes
CRA rental income audits are very rare. You can split the net income any way as long as 100% is accounted for by legal owners.
Deal Addict
Jun 11, 2005
2646 posts
311 upvotes
You should get some qualified tax advice instead of coming here. The concern here will be income attribution rules.

The accountants other posters have engaged seem to ignore income attribution? That is fine as long as you know the risks.

For rental property #2, depending on how much rent you get the income from the property might be flat anyway. So it might not matter who reports it, at least initially.
[OP]
Sr. Member
May 23, 2017
591 posts
351 upvotes
Thanks for the replies. Seems like this is a lot more complicated than I had thought...I've always done my own taxes but I guess this might be the time I finally pay a professional accountant to help me out.

Since it's so complex, I wouldn't be opposed to just splitting the rental income of both properties 50/50 (if it makes things simpler). But now I'm not sure we will be allowed to do this for property #1 even if my add my fiance to the deed. Though as per @michelb's example, it seems like a professional accountant has deemed that to be acceptable?
Deal Fanatic
Jul 4, 2004
5363 posts
1434 upvotes
Ottawa
If you don't want to pay for an accountant, just call CRA and ask them. I believe as far as CRA is concerned, if you are living together on Dec 31st at the end of the tax year, they consider you common-law.

IMO, no matter what each's income level is, I'd be very surprised if they refused a 50-50 split. On the other hand, if one spouse makes significantly more and you are claiming 90-10 by the other spouse, it might raise suspicion. This might be completely legit (and if it is, it's worth doing) but I'd want to confirm with an accountant before doing it. This might actually be legit (i.e. the spouse with the lower income actually actively manages the rentals so they actually are doing more of the work).

You also have to consider the actual amounts; if the total rental income is $10k/year, if my wife and I split 50-50, I'll likely pay $2k in taxes, she'll likely pay $1k in taxes where as if we did 25-75, I might pay $1000 and she might pay $1500 so we're saving $500 but is it worth risking an audit for that? I'd want to have good assurances that it won't cause issues with CRA before I attempt it.
Deal Addict
Nov 13, 2006
1048 posts
631 upvotes
If you plan to be married/common law with your partner for the period you plan to own the property, I recommend you buy the new property under a corporation. This way every year you can take off money from the corporation via dividends. Every December before year end in the "annual meeting" decide what the dividends will be for each director. This way as your and his income level changes every year you can decide which of the two can take off the money. This will also help you pay less taxes in the long run and good for family tax planning.

IF you do not want to do that then always split the rental income so that the lower income person is getting most if not all of the income. You can create an agreement where in year 1 you start off 50/50 and any loans between the two partners are done at the CRA prescribed rate of 1% which allows for you to loan money to your partner to buy the new property. As year 2-3 continues if you want to change the split just "payback" some of the loan to match the % where you want the split to be ie 80/20 or 60/40. As long as its documented CRA can't do much.

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