In an ideal world, your clients would be free to shift income between themselves and a spouse. Should there be a difference in tax rates between the spouses, this shifting of income would normally result in tax savings for the family. To prevent widespread income splitting, and presumably, to ensure a certain level of government revenue each year, “attribution rules” are in place. Other than certain government approved income-splitting strategies such as the use of spousal RRSPs and the splitting of eligible pension incomes, income-splitting opportunities with a spouse or common-law partner are limited.

The attribution rules state that when your client transfers property (eg. cash or other assets of value) to his or her spouse or common-law partner for less than fair market value consideration, income or capital gains earned from the property would be taxed to your client, not their spouse. For example, if Allen gifts $1,500 to his spouse, Meg, for no consideration and Meg invests the gift, any income and/or capital gains earned on the gift would be taxed to Allen, not Meg. Therefore, from a tax perspective, Allen and Meg are no further ahead by implementing this gifting strategy.

Knowing this, some interesting questions arise. How would the attribution rules apply if property is purchased with a joint line of credit (LOC)? If the line of credit is secured by a family home funded primarily by your client and not his or her spouse, would attribution apply to investments made by the spouse if funded by the line of credit? If interest is paid on the LOC, would the interest be tax-deductible? If yes, who is entitled to claim the interest deduction? Consider the following example:

Several years ago spouses CJ and Michelle purchased a home funded largely by a signing bonus CJ received when he started a new job. CJ’s new job provided him with a large annual income, and allowed Michelle to remain at home to care for their three young children. Looking to take advantage of low interest rates, CJ and Michelle applied for a joint LOC secured by their home, the terms of which allowed either spouse to draw on the LOC without authorization from the other. Once established, Michelle borrowed $75,000 from the LOC, the proceeds of which were invested in an income producing investment solely in her name.

Given that CJ contributed most of the capital to acquire the family home, and the LOC was secured by equity in that home, would income and capital gains earned on Michelle’s investment be taxed to CJ pursuant to the attribution rules? Even though the money was borrowed by Michelle solely, would the joint LOC result in attribution? Would interest payable on the loan be tax-deductible? If yes, who would claim the interest deduction?

Recently, the CRA provided guidance in this area in the form of a technical interpretation dated July 20, 2009. The interpretation suggests where a joint LOC is secured by a family home for which a taxpayer, CJ in this case, contributed most of the capital, this fact does not, in and of itself, result in attribution. In other words, on its own, collateral used to secure a loan does not normally determine attribution. However, where an individual provides security on a loan, they are generally offering a guarantee to repay all or part of the loan (and corresponding interest) should the borrower default on payments. If such a guarantee is provided, the Income Tax Act (ITA) deems the loan was made to the borrower (Michelle) from the person offering the guarantee (CJ), meaning, in the case of spouses, attribution normally applies. There is an exception though – where interest is charged by the loan provider at commercial rates, attribution will not apply provided the borrower (Michelle) uses his or her own money to pay the interest and it is paid within 30 days after the year in which it is due.

Therefore, referring to the above example, although CJ guarantees the repayment of Michelle’s loan by virtue of the joint status of the LOC, attribution would not apply to Michelle’s income or capital gains provided she pays interest to the LOC provider based on commercial rates defined at the time the money is borrowed. Where these conditions are satisfied, income and capital gains earned by Michelle would remain taxable to her at her lower tax rates. Note though, to avoid the attribution rule, Michelle must pay the interest with her own money. If CJ pays any portion of Michelle’s principal or interest, attribution would normally apply.

The technical interpretation also states interest is generally tax-deductible when a spouse borrows money from a joint LOC to buy income-producing investments in his or her name. Provided attribution does not apply to Michelle’s loan, she should be able to deduct her interest payments provided the borrowed money is devoted to investments that have the potential to earn income.

When contemplating the use of joint lines of credit for investment purposes, it is a good idea for clients to consult a tax professional to ensure their objectives align with applicable tax legislation – particularly since the CRA has indicated that general anti-avoidance rules could apply to frustrate such strategies if it is determined that one of the main purposes of the strategy is to reduce the tax liability of the participants. In light of this, where clients participate in this type of arrangement, they should keep detailed and thorough records to prove borrowing and repayment histories should they be selected for an audit.

Wilmot George , CFP, TEP, CLU, CHS, is vice-president, Tax, Retirement and Estate Planning, at CI Investments. Wilmot can be contacted at