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Estate Planning: Joint Ownership
Tax Considerations
Risks and Loss of Control
What Are Your Objectives
Use of Joint Ownership in Estate Planning
How Does Joint Ownership Work
Tax Considerations
As already mentioned, converting a solely owned property to joint ownership status with rights of survivorship can lead to unexpected tax consequences. Our federal Income Tax Act administered by Revenue Canada views the transferring or re-registering of capital assets, such as real estate, stocks or mutual funds, from sole ownership to joint ownership, as a deemed disposition by the original owner at the asset’s fair market value at the time of transfer. If the present market value of the transferred property exceeds its adjusted cost base (the tax cost of the property to the original owner), the difference or the capital gain could be taxable and included in the transferor’s income during the year of disposition.
These undesired tax consequences do not occur when the original owner or tax payer names his or her spouse as the new joint owner, because such transfers between spouses can be done at the adjusted cost base of the transferred property, instead of it's fair market value. Appropriate elections and filings have to be made with Revenue Canada to document such transactions. It should be noted, however, that future income and capital gains from the property can be attributed back to the transferor spouse. It should also be remembered that most couples’ primary property, their home, if registered jointly also transfers to the survivor upon death, tax free, due to the principal residence exemption to capital gains tax included in the Income Tax Act.
Some people attempt to avoid the undesired tax consequence by transferring joint ownership to a non-spouse (i.e. a child), by utilizing a Trust Agreement as a side agreement between the original owner and the new joint owner. Under such a Trust Agreement the new owner renounces any claim to beneficial ownership or entitlement to the jointly held property, agreeing to hold it as joint owner in name only in trust for the original owner. The Income Tax Act provides there is no deemed disposition if legal ownership changes without changing beneficial ownership. This strategy, however, torpedoes the effective use of joint ownership for estate planning purposes, because the Trust Agreement is evidence of no intention by the original owner to transfer survivorship rights to the new joint owner. Such a Trust Agreement will ensure that the surviving joint owner holds the property in trust for the deceased’s estate, and the properties value will be included in the deceased’s estate for purposes of calculating probate fees.
Risks and Loss of Control
There are certain risks involved when an owner of property transfers a joint interest in that property to someone else. This risk is usually of greater concern when the joint owners are not spouses (i.e. parent and child).
As all joint owners own an interest in a jointly held property, it can be subject to becoming encumbered and divided upon the breakup of one owner’s marriage, or even be subject to being realized or seized by a joint owner’s creditors upon insolvency, or by a Trustee in Bankruptcy if a joint owner becomes bankrupt.
Joint ownership can also be severed or terminated by the actions of one of the joint owners, without the other owners necessarily knowing about it. For example, a joint owner can sign and register a land transfer of his joint interest to himself, effectively converting the joint interest into an tenancy in common, unilaterally terminating survivorship rights.
Lastly, with bank accounts, one joint owner can usually drain a joint completely dry without notice to the other joint owner.
It should also be recognized that after transferring a joint interest to someone, you may become unable to make decisions relating to that property without involving the other joint owner. For example, if you owned land and subsequently made your son a joint owner of the land, you will not be able to mortgage or sell it without your child’s consent and signature on the documents. This restriction can be avoided through the use of a Power of Attorney from your child to yourself; however, Powers of Attorney can be revoked or canceled.
All these risks should be recognized and assessed before you transfer a joint interest in property to someone else.
What Are Your Objectives
Joint accounts are extremely useful for estate planning purposes if the primary concern is to avoid probate fees and if an ancillary concern is to defer taxes. If the capital property has a significant capital gain inherent in it’s present fair market value, the need to avoid triggering that capital gain will probably outweigh the need to avoid probate fees. The top tax rate on capital gains can be as much as 40%, while the top probate fee is only 1.4 %.
It is obvious, however, that both probate fees and income taxes on capital gains or income earned from the property can be avoided by registering capital properties jointly from the beginning of the investment.
The choices you make will depend upon the circumstances you face, and it is important for you to seek the advice of your lawyer and tax accountant to look for the answers which are best suited and tailored to your circumstances.
This article is written by Roy Sommerey, a partner of Doak Shirreff whose practice includes estate and tax planning, wills and estates.
The opinions set out in this article reflect generally on this area of law. The impact of the law on any given situation depends upon each individual's circumstances and the opinions contained in this article should not be relied on for assessing anyone's legal position. Advice should be obtained directly from our lawyers regarding your personal situation before you make any decisions.
Use of Joint Ownership in Estate Planning
Joint ownership is a popular estate planning tool, because it provides a means of transferring property between people (usually family members) with minimal or no financial or administrative consequences, if handled correctly. A capital asset, such as land, a bank account or an investment account, can be registered or opened jointly as a means of reducing or avoiding probate fees or estate administration taxes when one of the joint owners dies. Caution should be exercised when using joint ownership for estate planning because transferring or converting a piece of land or account or another income earning capital asset to joint status could trigger immediate capital gains tax, as well as income attribution back to the original owner.
How Does Joint Ownership Work
Joint ownership intended for estate planning must include rights of survivorship between joint owners which is required to avoid probate fees on death. Each joint owner is deemed to own all of the jointly held property while alive. On the death of one joint owner, the rights of survivorship provide the surviving joint owner(s) with ownership of the jointly held property. The jointly held property passes outside the deceased owner’s estate, and is not included in the value of that estate upon which probate fees are charged. This also means that the disposition of your jointly held property cannot be governed or controlled by your Will. In British Columbia our provincial government currently imposes probate fees based on the value of an estate as follows:
Gross Value of Estate: Probate Fee:
$0.00 - $10,000.00 $0.00 (free)
$10,000.00 - $25,000.00 $208.00 (flat fee)
$25,000.00 - $50,000.00 $6.00 per $1,000.00 *over and above the flat fee
$50,000.00 and over $14.00 per $1,000.00 *over and above the previous fee
*the amount will be rounded up to the next $1,000.00.
For example, if the gross value of an estate is $237,431.50 (debts are not taken into consideration to reduce estate value), the probate fee for the estate is as follows:
On the first $25,000.00 $208.00
On the next $25,000.00 (which is 25 x $6.00) 150.00
On the remainder: $237,431.50 - $50,000.00 = $187,431.50 (the amount is rounded up to the next thousand) 188,000.00 x $14.00
2,632.00
TOTAL PROBATE FEE PAYABLE: $2,990.00
If the gross value of the is estate is made up entirely of a jointly held interest in a home, then no probate fee is payable (and there is no estate to probate). If a spouse is in the unfortunate position of owning the entire home, subject to a $200,000.00 mortgage, the full value of the home will be included in the estate and the probate fee paid accordingly before it can be transferred to the surviving spouse.
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