Yours, mine and ours…

We frequently are asked to advise on a client adding onto title the name of another, usually related, individual. In fact, usually, it is an adult child. This may pertain to a bank account, a home, another real estate asset or a brokerage account.

In almost all cases, the perceived motivation is to “beat some taxes”. Fair enough: that’s a wise and honourable goal, if done properly and legally! However, oft-times, the reality and the perception are divergent. The “taxes” people are talking about are some combination of income taxes and “death” taxes.

Death taxes are particularly misunderstood. In olden days, many Western societies had a death tax, usually termed an “Estate” tax. In some societies, like the UK, these death taxes were indeed draconian and claimed the vast portion of a deceased’s accumulated wealth for the state’s coffers. Estate taxes always went hand-in-hand with a “gift” tax, because otherwise, taxpayers could plan their way around estate taxes simply by ensuring to gift everything before they died. So, gift and estate taxes were a package, and in Canada were a provincial matter. All provinces scrapped this double-barrel revenue raiser, with British Columbia doing so in the mid-Seventies. Instead, taxation on death was folded into the income tax system, which both the provinces and the feds could share. The good news in that change was that the gift tax was repealed and a lot of (but not all) inter-vivos gifting no longer attracted the taxman’s claws. However, the Income Tax Act makes no distinction between “gifting” and “selling” to a related party (except a spouse): both trigger the same tax implications.

We also got the “probate” system in the change and this allows the provinces to charge a fee for the services rendered in executing the transfer of a deceased’s assets to his/her heirs. Probate fees attracted some attention in the newspaper headlines when a challenge in Ontario claimed that the fees charged could only be a reasonable recovery for services rendered, instead of some form of provincial revenue-raising. That challenge ultimately failed.

The point of joint tenancy is that, upon the death of one party, the shared asset automatically belongs to the remaining party, and that title can pass without awaiting the grant of probate or incurring the percentage charge that accompanies that grant. So, this seems like the proverbial “no-brainer”; although CRA is on record in obiter dicta on this subject that they are not convinced that the provincial probate is legally dodged with this strategy. In any event, we live in a complex society and an action can fall prey to several statutes or government agencies. For instance, placing your adult child on title may run afoul of the Income Tax Act in a number of circumstances.

Principal Residence

If you put your child on title on your home, technically you may be denying access to the one great tax break available to everyone: tax-free appreciation on your principal residence. The transfer of title conveys half of the property interest to your child. If the child already has his/her own principal residence, then this half-interest is a second property and is NOT eligible for tax-free appreciation. When the parent dies or sells the house, half of the gain to that time from the time of transfer is subject to capital gains tax for the child. Oops!

Brokerage Account

If you put your child on title on your brokerage account, technically this results in a half-disposition of everything owned there, resulting in capital gains tax for the parent at that time. If the resulting tax is significant, then cash will need to be raised to pay the bill. Also, future income from the portfolio – interest, dividends and capital gains – ought to be shared between the parent and the child. Depending on the relative incomes of the two, this may be disadvantageous, as typically, the working child has a higher tax bracket than the retired parent.

Recreational Property

Family treasures of long-held recreational property always cause an estate planning dilemma and we have yet to see a tried-and-true solution to the problem. Typically, the property has been held for many years and as a result has a large unrealized capital gain. Selling or gifting half to a child triggers tax on half of the gain to-date. (See articles on the website on this topic.)

There is one situation where joint tenancy may not run afoul of tax law. This is when the asset concerned is cash, which is essentially a “base element” in the financial world. So, joint tenancy on a bank account, or on a newly-created brokerage account which starts with only cash, would not trigger any deemed dispositions because there are none. The concept of beneficial vs legal ownership pertains here. Legally, the asset (e.g. a bank account) belongs to all of the joint tenants. That is useful for the probate purpose. Beneficially, the income from the asset belongs to the party who owned the cash. So, as long as the parent reports any income subsequently earned from whatever income the cash earns, there are no tax problems, and the asset may dodge the probate fee upon death of any of the parties.

There is also the issue of risk management in estate planning. When a child is added to title, their personal wealth increases. If that child is sued or divorces, the parent’s asset may be attached in the legal wrangling. Lastly, joint tenancy strategies also become more complicated when there is more than one child and the above problems are compounded by adding several names to title.

Recent Court Judgements in 2007

Recent Court judgments in 2007 add some clarity and highlight the issues when someone chooses to add someone else as a joint tenant on some assets.

By way of brief background, a person might add their spouse or child on title to a bank account or brokerage account or their home or cottage. The intentions may include facilitating the estate process or dodging the probate fees on death, or other goals, such as giving that asset to one beneficiary to the exclusion of other beneficiaries.

There are multiple issues to address before embracing a joint tenancy strategy. First, unanticipated income tax liability may arise if the Tax Act takes the position that this constituted gifting, thus giving rise to capital gains disposition tax. Also, the taxing of the ongoing future investment income now needs to be split with all joint owners. Second, the transferor’s asset may be exposed if the transferee experiences some turbulence in life, e.g. a divorce or bankruptcy. Third, upon death, the excluded beneficiaries may challenge the gifting that went on inter-vivos, thus exposing the family to costly and caustic legal battles over entitlement.

This was precisely the issue with two family cases that proceeded through the entire legal system to the Supreme Court. By coincidence, the two judgments sided oppositely to one another but some clear first principles have been enumerated.

The issue is whether gifting was intended when the second name was added to the asset in question. While both names may appear on title, the fundamental concept of legal vs beneficial ownership allows the transferor to retain the asset while alive, with the joint tenancy strategy solely intended as an estate plan. In trust law, this situation is described as a “presumption of resulting trust”, meaning that the transferees registered title was only “in trust’ for the original party and his estate. Trust law does not automatically attribute gift status when no consideration was given by the transferee. In trust law, a “presumption of advancement” takes the opposite route in assuming that a gift was intended.

The Supreme Court ruling affirmed the following as guidelines:

  • The presumption of resulting trust is the general rule for gratuitous transfers, and the onus falls on the transferee to prove otherwise.
  • The presumption of advancement is now limited to gratuitous transfers to minor children.

Evidence of intent could be derived by the Courts from the wording used in bank documents, the actual control and use of the asset, the bearing of related taxes or the grant of a power of attorney. Alternately, and best, a separate signed document ( a “Declaration of Intention”) should be written to clearly outline the transferor’s intentions with joint tenancies. This should be separate from, but stored with, the will, with copies for the transferee and the asset custodian (where relevant).

These new guidelines are useful for both new joint tenancy strategies, as well as pre-existing ones, if the parties wish to mitigate the risk of future big problems. Words to the wise to clarify past intent for previously executed joint tenancy strategies!

Remember, however, that this Court ruling only addresses the third issue cited above: the other two still remain to be considered before you undertake this strategy.

Article Revised: December, 2007