Often cited reasons for registering property1 in joint names include wanting to avoid probate,2 expediting asset distribution following death and easing account administration. Unfortunately, many “do-it-yourself” estate plans fail to achieve these objectives and may introduce additional pitfalls, particularly when owning property jointly with someone other than a spouse or common-law partner.
Forms of joint ownership
There are two typical forms of joint ownership: joint tenants with right of survivorship (JTWROS) and tenants in common (TIC).3 Unless stated otherwise, all references to joint ownership in this article refer to JTWROS.
Risks of joint ownership
1) Loss of control
The new joint owner of a bank or non-registered investment account could withdraw funds without the original owner’s consent; the new owner of a real estate asset held JWROS could unilaterally “sever” a joint tenancy and dispose of their share without the original owner’s consent. Other decisions regarding jointly held real estate may require the cooperation of all owners.
2) Exposure to creditors
Jointly held property is exposed to current and future personal and business creditors of all joint owners.
3) Exposure upon relationship breakdown
Jointly held property with an adult child may be exposed to claims by the child’s partner in the event of a relationship breakdown.
4) Family conflict
When only one of multiple children becomes a joint owner with a parent, there is potential for conflict and dispute among siblings over the parent’s intentions following their death. Did the parent intend to gift the property to one child to the exclusion of the others, or was the one child meant to simply hold the property in trust for their siblings? What happens if the surviving joint owner does not honour a promise to distribute the asset in accordance with their parent’s wishes? What if they die or become incapacitated before the distribution?
5) Accelerated tax consequences
The Income Tax Act allows property to be rolled over to a spouse on a tax-free basis (at cost). However, gifts and transfers of beneficial ownership4 to a person other than a spouse are deemed to be at fair market value, triggering any unrealized capital gains to be taxable at that time.
6) Potential ineffectiveness in avoiding probate
There is a risk that some “do-it-yourself” estate plans that rely on joint ownership with an adult child to avoid probate not only expose jointly owned assets to the risks identified above but may not even avoid probate. This may arise from the inherent contradiction in having the parent retain the full rights and benefits of ownership without reporting capital gains at the time of transfer to joint ownership, while contending that a change in beneficial ownershipiv took place for the purpose of excluding the asset from probate.
Consult professionals and document intentions
At the heart of many family disputes and litigation is the issue of whether adding a joint owner presumes (1) an immediate gift with a right to control plus a right of survivorship, (2) a temporary trust arrangement without right of survivorship or beneficial interest, or (3) a gift of the right of survivorship with no other rights.
Before transferring assets into joint name, carefully consider your intentions – what are you trying to accomplish? Reducing or eliminating probate is a legitimate objective, and holding assets jointly may accomplish this. But as with any planning, consider the costs (risks) and benefits (savings) of this strategy and whether any alternative strategies may better meet your needs.
The Supreme Court of Canada has ruled in differing ways based on the facts and evidence specific to each situation. When registering an asset jointly (particularly with someone other than a spouse), it is essential to clearly document your intention, which may, for example, be formalized with a “deed of gift” or “bare trust agreement.” As such, legal and tax advice should be sought prior to transferring an asset into joint ownership.
Consider new trust reporting rules
For taxation years ending on or after December 31, 2023, a far wider range of trusts, including bare trusts, will be required to file a tax return and report additional information about their stakeholders to the Canada Revenue Agency (CRA). The deadline for filing a trust return is 90 days after the taxation year-end. For more information, ask for our article, “New Trust Reporting Requirements.”
Weigh alternative strategies
Given the many risks of holding property as JTWROS with someone other than a spouse, it is useful to start by critically considering your main objectives and then deciding which tools or strategies best meet your needs. Below is a summary of five commonly used strategies to not only avoid or reduce probate fees, but also address other estate planning objectives.
Conclusion
Holding property jointly with a spouse is often a very practical strategy with respect to continuous access by both spouses and in avoiding probate fees upon the death of the first spouse. Introducing an adult child as a joint owner invites additional risk and may accelerate capital gains tax. Legal and tax advice should be sought prior to transferring an asset into joint ownership.
1 The term “property” includes personal property such as a bank or investment account as well as real property (real estate). The terms “property” and “asset” are used synonymously throughout this article.
2 Probate is an estate-settlement process for which fees are charged. It involves having a provincial probate court: confirm that a will is the deceased’s final and valid will; confirm who will function as executor(s); and acknowledge what assets are passing through the estate. Executors must swear an affidavit that they have reported all the deceased’s assets in the probate application. While probate isn’t necessary to settle every estate, often third parties such as financial institutions and land title offices require proof of a grant of probate before they will allow money or property to be transferred out of the deceased’s name. To provide probate services, courts charge fees. BC’s probate fees are based on the gross value of all estate property and are on average 1.4% of the probatable estate’s value. However, not all assets owned by the deceased are subject to probate: for example, accounts and life insurance policies with valid beneficiary designations could pass without being included in the probated estate.
3 Under Joint Tenancy with Right of Survivorship (JTWROS), each owner has an undivided interest in the property with identical interests and equal rights to the whole property. Depending on the original owner’s intent and relationship with the new owner, the deceased co-owner’s share may pass directly to the surviving co-owners, bypassing the deceased’s estate and without reference to their will. With Tenants in Common, co-owners have a divided interest in the property and may hold different shares. There is no right of survivorship, and each co-owner’s share forms part of their estate and is distributed per their respective wills (or provincial intestacy rules where the deceased has no valid will).
4 Legal and beneficial ownership may be the same but can also be held separately. Legal ownership: The legal owner may have property registered in their name (title) but held in trust for a different true owner. Legal ownership on its own has no real value or rights. Beneficial ownership: The beneficial owner is the real owner of the property and is the one who can ultimately exercise the rights of ownership on the property. If legal title to an asset is transferred into joint names from “A” to “A and B” but beneficial ownership stays with A, and on A’s death probate is required, the value of the jointly registered asset must be disclosed on the probate application. The distinction between legal and beneficial ownership is also relevant in determining income tax implications, as it is a change in beneficial ownership (not merely legal title) between parties other than spouses that gives rise to a deemed disposition and may result in capital gains or losses.
This article is for general information only and should not be construed as tax or legal advice. None of the strategies described in this article should be undertaken without legal advice. Please consult your tax and legal professionals to assess your specific circumstances.
Odlum Brown Financial Services Limited is a wholly owned subsidiary of Odlum Brown Limited, offering life insurance products, retirement, estate and financial planning exclusively to Odlum Brown clients.