A taxpayer who is entitled to the spousal tax credit for his/her spouse or common-law partner may include all of the spouse’s dividends from taxable Canadian corporations in his/her income. This option is only available if doing so will allow the taxpayer to claim, or increase the claim, for the spousal tax credit. There is no option to include only part of the spouse’s dividends.
There is no special form to fill out to do this. The spouse’s dividends would just be included on the taxpayer’s income tax return.
Transferring the dividends may not always be beneficial. Taxes payable should be calculated both ways (with and without the transfer), in order to determine which method results in lower taxes.
If the spouse has incurred deductible interest expense in order to earn the taxable dividends, the interest expense deduction is not transferred to the taxpayer. It may be used by the spouse to reduce other income. If the interest expense exceeds other income, a non-capital loss is created.
If the spouse with the dividend income is a student, the transfer of the dividend income to the taxpayer can sometimes be very beneficial, and may also result in a partial transfer of the tuition/education amounts to the taxpayer.
Canada Revenue Agency (CRA) has information on this transfer, in the General Income Tax and Benefit Guide, under Line 120 – Taxable amount of dividends from taxable Canadian corporations.
Tax Tip: Try to arrange your finances so that both spouses have equal income before and after retirement.
For more information visit the CRA about Line 120: www.cra-arc.gc.ca/line-120