Can you put an inheritance into a joint account?

Taxation of an inheritance

First off, the receipt of an inheritance is generally not taxable. Most or all tax is paid by the estate of the deceased, and the after-tax proceeds are distributed to the beneficiaries. 

There can be exceptions. If you inherit real estate and sell it later, subsequent appreciation may be considered a taxable capital gain. If you inherit private company shares, depending on the planning you do post-mortem, a withdrawal from the corporation may be considered a taxable dividend to you. 

But generally, a cash inheritance is tax-free to the beneficiary because any applicable tax has already been paid.

Who does an inheritance belong to?

In most cases, a will leaves an inheritance to a child rather than to a child and their spouse jointly, although joint gifts to a couple are possible.

As a result, inherited property is initially an asset of the beneficiary child. This same concept applies when someone works and earns an income. That cash is theirs for tax purposes. 

What is spousal attribution?

If an individual earns an income or receives an inheritance and gives some of that money to their spouse to invest, there are spousal attribution rules that apply. The result is that any investment income earned by the recipient spouse is taxable to the spouse who gifted the money in the first place. 

A joint account could be impacted by these attribution rules, as well. If you put an inheritance into a joint account, the income should be reported by the spouse who received the inheritance, not 50/50. 

What about a formal gift to your spouse?

Gifting money from an inheritance or from your income to your spouse does not negate the spousal attribution rules. There is no formal way you can override the rules contained in section 74.1(1) and 74.2 of the Income Tax Act. And an inheritance is not one of the exceptions listed in section 74.5.

But there are a few common exceptions.

Contributions to your spouse’s RRSP or TFSA

You can give your spouse money to contribute to their registered retirement savings plan (RRSP), tax-free savings account (TFSA), or similar tax-preferred accounts. Subsequent income is not taxable to you or your spouse. RRSP withdrawals are eventually taxable, but it does not matter which spouse’s capital was used to fund the initial contributions. 

So, if your spouse has TFSA room, it may make sense from a tax perspective to fund their TFSA. If they have an existing TFSA, you could even get creative. You could take a withdrawal from their TFSA—ideally late in the year—and use that withdrawal to fund a non-registered account in their name. Then, you could use the inheritance to replenish their TFSA. 

Any TFSA withdrawals in the previous year get added to your TFSA room on January 1 of the subsequent year. So, a December TFSA withdrawal can be added back the next month. 

What if you want to put an inheritance into a joint account?

If you put an inheritance into a joint account because that is how you and your spouse want the money invested, that is fine. You can have an account that is legally joint, but that “beneficially” belongs to the inheriting spouse. 

In other words, beneficial ownership for tax purposes can be different from legal ownership. The inheritor can report 100% of the income on their tax return even though the account is joint for administrative purposes. 

Are there workarounds?

There can be workarounds, and one is to loan money to your spouse to invest. The caveat is that it must be loaned at the Canada Revenue Agency (CRA) prescribed interest rate in place at the time of the loan. Currently, that rate is 3%. 

The borrowing spouse must actually pay interest to the lending spouse, and the interest income must be reported by the lender and is taxable. The borrower can deduct the interest on their tax return. If the loaned funds generate more than a 3% return, there may be an advantage, effectively shifting income from one spouse to the other—legitimately.