ARCHIVED - Taxable Dividends Received After 1987 by a Spouse
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DATE: April 27, 1990
SUBJECT: INCOME TAX ACT
Taxable Dividends Received After 1987 by a Spouse
REFERENCE: Subsection 82(3) (also section 121, subsection 74.1(1) and paragraph 118(1)(a))
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This bulletin applies for taxation years ending after 1987. For taxation years before 1988, see Interpretation Bulletin IT-295R3 dated March 2, 1987.
This bulletin discusses the election to include in the taxpayer's income all taxable dividends from taxable Canadian corporations received or deemed to have been received by the taxpayer's spouse if such inclusion increases the taxpayer's married tax credit. The election would ordinarily be made if the taxpayer's claim for the married tax credit would be reduced as a result of the spouse's receipt of the particular dividends and the spouse would not be subject to tax. Dividends on which the taxpayer has elected are excluded from the spouse's income. The election enables the couple to maximize the dividend tax credit and the married tax credit, thereby reducing the tax payable.
Discussion and Interpretation
¶ 1. In a valid election under subsection 82(3), all taxable dividends actually received, or deemed to be received, by the spouse of a taxpayer from taxable Canadian corporations are deemed to be received by the taxpayer and not the spouse if the taxpayer so elects in the income tax return for the year and a married tax credit under paragraph 118(1)(a) (see the current version of IT-513, Personal Tax Credits) is created or increased. Once an election has been made it cannot be revoked. Where the taxpayer so elects the dividends are excluded in determining the spouse's income. This allows the couple to take the best advantage of the dividend tax credit and the married tax credit as illustrated in the example in ¶ 4 below. An election under subsection 82(3) is not applicable for dividends received by the spouse but deemed by the attribution rules (subsection 74(1) or 74.1(1) as the case may be) to be received by the taxpayer.
¶ 2. Where interest or other charges are incurred by the spouse to earn taxable dividends and an election is made under subsection 82(3), the Act does not provide for the transfer of expenses incurred by the spouse that relate to the dividends transferred under that subsection. However, such interest or other charges which are otherwise deductible under the Act, may be deducted against any other income of the spouse. The income so reduced will be the income of the spouse for purposes of computing the taxpayer's married tax credit under paragraph 118(1)(a). On the other hand, where the spouse has no income or insufficient income to absorb the interest or other charges, a non-capital loss is created either to the extent of the interest or other charges or to the extent that they exceed the spouse's income. Furthermore, the interest or other charges (to the extent that they all within the definition of "investment expense" in subsection 110.6(1)) increase the spouse's cumulative net investment loss by virtue of (a) of the definition in subsection 110.6(1).
¶ 3. Only dividends received by a spouse in respect of whom the taxpayer is entitled to a married tax credit under paragraph 118(1)(a) qualify for the election under subsection 82(3).
¶ 4. Whether electing under subsection 82(3) is beneficial can only be determined by comparing the tax payable under each alternative (i.e., making, and not making, the election). An example, based on figures for the 1988 taxation year, of the manner in which these rules can apply follows:
|Taxpayer's income:||$20,000 net income; no interest or dividends.|
|Spouse's income:||$2,400 dividends plus $600 gross-up for a total of $3,000.
$300 interest paid to earn dividend income.
|Net and Taxable Income||$||2,700||$||20,000||$||23,000|
|Calculation of Personal Tax Credits|
|Basic Personal Amount||$||6,000||$||6,000||$||6,000|
|Married Amount (Note 1)||---||2,800||5,000|
|Total Personal Tax Credits|
|(17% of Total Amount)||$||1,020||$||1,496||$||1,870|
Federal Income Tax
(17% of Taxable Income)
|Subtract: (Note 2)
Total Personal Tax Credits
|Federal Dividend Tax Credits||400||---||400|
|Total Tax Credits||1,420||1,496||2,270|
|Basic Federal Tax Payable||nil||$||1,904||$||1,640|
|Note 1: $2,800 = $5,000 - ($2,700 - $500)|
|Note 2: These tax credits do not give rise to refundable amounts.|
Thus in the example it would be beneficial for the spouse and the taxpayer to elect as it reduces the basic federal tax payable by $264. The spouse also has a $300 non-capital loss as a result of the interest which could not be deducted.
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Director, Business and Publications Division
Income Tax Rulings Directorate
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