Joint ownership (also referred to as “joint tenancy”) can be an effective means to transfer wealth between spouses or common-law partners, or to later generations. In all provinces except Quebec, accounts are often registered jointly as a way to reduce or avoid probate fees.
Joint Ownership
The most common forms of community ownership are joint tenants with rights of survivorship (JTWROS) and tenants in common (TIC).
JTWROS
Joint ownership, a common-law concept, is a form of property ownership involving two or more owners that provides each owner with an undivided and identical interest in the property and, more important, the right of survivorship. Upon the death of one joint owner, the deceased’s interest in the account terminates, leaving the surviving joint owner(s) with full ownership, despite any attempted disposition in the deceased’s Will.
TIC
TIC differs from JTWROS in that there is no right of survivorship associated with it. When a co-tenant dies, his or her share passes on to his or her heirs through the Will or the rules pertaining to intestacy (where the deceased has no Will).
As compared with equal interests under JTWROS, tenancy in common need not be 50/50, but rather can be in any proportions.
Why Joint Ownership?
There are two comon reasons given for registering an account jointly. The first is to minimize or avoid probate taxes.The second is to ease the continuing administration of the account. For example, elderly parents might place their investment accounts into joint names with their adult children to facilitate dealing with the account in the future.
Dangers of Jointly Held Property
Before placing accounts in joint names, there are some potential risks that need to be taken into consideration. A transfer of property generally means not only a loss of control over the property but also quite often the inability to make decisions relating to the property without the consent of the joint owner.
Assets held in a joint account may become exposed to creditors of the other joint accountholders, whether or not insolvency or bankruptcy comes about. Further, if most or all of an individual’s assets are held under JTWROS, the deceased individual’s estate may have insufficient assets to pay his or her final taxes and other liabilities.
In addition, when the parent dies, the child may become the sole legal owner of the account, which could lead to a dispute with other siblings or family members who believe that they should have a claim on the jointly held account. Finally, if the account is transferred to an adult child, it may also become open to division upon breakdown of a marriage or common-law partnership of the child and his or her spouse or common-law partner.
If a residence is involved, this could jeopardize or at least complicate all the joint owners’ access to the principal residence exemption. Finally, it could also limit eligibility as a “first-time home buyer” for purposes of participation in the Home Buyers’ Plan (HBP).
Joint Accounts & Probate Taxes
The court process for confirming the validity of the Will is historically referred to as “probating” the Will. In all provinces (other than for notarial Wills in Quebec), there is a fee levied by the court for submitting such an application. The fee is calculated as a percentage of the value of the deceased’s estate at the time of death, and there is usually no maximum.
With proper planning, probate taxes can be avoided or at least reduced. Under joint ownership, upon the death of one of the joint owners, the deceased’s interest terminates, thereby increasing proportionately the interests of the surviving joint owner(s). The deceased’s interest is sometimes said to have been transferred “outside of the estate,” but strictly speaking, there is no “transfer.” In bypassing the estate, the value of the deceased’s jointly held account is excluded from the value of his or her assets subject to probate and, thus, probate taxes are avoided on the value of the account. However, the transfer of a solely owned account to joint ownership can have income tax implications that should be balanced with the probate tax concerns.
Deemed Disposition & Capital Gains
For income tax purposes, a disposition occurs when there has been a change in “beneficial” ownership as opposed to a change in “legal” ownership. In determining whether each joint owner has beneficial ownership, a number of factors should be considered:
- Whether the account was owned by one of the joint owners prior to making it a joint account
- Evidence of the transferor’s intention to gift the account to the transferee
- Whether income post-transfer was used jointly rather than for the sole benefit of the transferor
- How income was reported for tax purposes during joint ownership
- Whether the transferee actually exercised control over the account prior to death of the transferor
Where the legal owners have beneficial ownership, each joint accountholder is equally responsible for the tax liability. Each must report earnings based on his or her proportionate ownership, except where the attribution rules apply (discussed under the heading below, “Transfer to spouse or common-law partner”).
The Canada Revenue Agency (CRA) has consistently taken the view that the transfer of property solely owned by a taxpayer into a true joint ownership arrangement (one in which beneficial ownership has changed) would result in a disposition. However, it would not be a disposition of the “full” account but, rather, only the proportionate interest that is being transferred to the transferee(s). For example, an investor who adds one person to her account would be said to have disposed of 50% of the account. Similarly, an investor who adds two people to his account would be considered to have disposed of 66.67% of his account.
Commonly, transfers occur between spouses or common-law partners, and possibly over to an adult child or adult children. Each of these transfers can result in different tax consequences to both the transferor and transferee(s).
Transfer to Spouse or Common-Law Partner
When an investor transfers his or her account into joint ownership with his or her spouse or common-law partner, no capital gain or loss will occur. This is because capital property can generally transfer between spouses or common-law partners on a tax-deferred basis. As a result, the proceeds of disposition to the transferor spouse or common-law partner would be equal to 50% of the Adjusted Cost Base (ACB) of the property. The transferee spouse or common-law partner will then be deemed to have acquired the property for an amount equal to 50% of the ACB.
An election is available to a transferor spouse or common-law partner to have the account transferred at fair market value (FMV). This might be elected where the transferor spouse or common-law partner has unused capital losses from the disposition of other properties (either in the current year or carried forward from prior years), which could offset the capital gain triggered on the transfer. In such a case, the transferor spouse or common-law partner will elect to have transferred 50% of the property at its FMV, and the transferee spouse or common-law partner will be deemed to have acquired the property at that same FMV.
Despite the ACB rollover of capital property, the spousal attribution rules will generally apply to future income from the property. All income and capital gains/ losses generated from the transferred property will generally be attributed back to the transferor spouse or common-law partner for tax-reporting purposes. There are some exceptions to the attribution rules that are beyond the scope of this piece. For more information, please see our Tax & Estate InfoPage titled Income-splitting opportunities and the income attribution rules that may prevent them.
Transfer to Adult Child
Where an adult child is added to an account, the transfer or gift will normally trigger a capital gain/loss through a deemed disposition of half the account. This may be problematic for the transferor in cases where the property has significant capital appreciation. Tax will be due on the deemed disposition without any cash arising to pay the tax bill.
The new joint owner – the son or daughter – acquires the account at proportional FMV. Each accountholder will be taxed on 50% of any future income and capital gains/losses generated by the account. Upon the death of either joint owner, there will be a disposition of the 50% interest owned by the deceased joint owner and a capital gain/loss may result.
The Use of a “Side Document”
To address the potential of having capital gains triggered when an account is registered in joint names with a non-spouse, a “side document” might be used. This document is generally in the form of either a statutory declaration or declaration of trust stating that the child or children added to the account has/have legal but not beneficial interest in the account.
The standard practice of the CRA is that if beneficial ownership has not changed, no disposition for tax purposes will have occurred on the transfer of the account to joint ownership. As a result, a taxable disposition would be deferred until the parent sells the property or is deemed to have disposed of the property at death.
However, this strategy may not be effective to avoid probate tax on the value of the account when the parent dies. The reason is that in such a situation, a beneficial joint tenancy does not exist. Accordingly, the executor of the deceased parent’s estate may have to disclose the property in a probate application if it is to be distributed according to the terms of the deceased parent’s Will. Furthermore, it may be open to interpretation whether and to what extent creditors are affected by joint ownership variations, and therefore consultation with a lawyer is advisable before taking any planning steps.
Who Pays the Tax?
Generally, each joint accountholder is required to include a proportion of the account’s income and capital gains/losses in his or her income for tax purposes. The total income and capital gains/losses are divided among the joint account owners based on each individual’s proportion of the account of which the individual beneficially owns. For example, if two individuals each beneficially own 50% of an account, then each individual would report 50% of the income for tax purposes. If the joint owners are spouses or common-law partners, the attribution rules may affect the tax treatment.
If one of the joint owners dies during the year, any income or capital gains/losses realized following the day of death will generally be reported for tax purposes in the names of the surviving joint owners.
Joint Accounts & Death
Upon the death of one of the joint owners of an account, the deceased will be deemed to have disposed of his or her share of the account for proceeds equal to the FMV of his or her portion of the account. Any resulting capital gain/loss would be reported on the deceased’s terminal tax return for the year of death. The surviving joint owner would be deemed to have acquired the deceased’s portion at FMV and would adjust his or her ACB accordingly.
Note that if the joint owner is a surviving spouse or common-law partner, the proportionate share of the account would be transferred at ACB unless an election was made in the deceased’s terminal return to have the asset transferred at FMV.
A similar tax result would occur if the account was held as TIC except that the estate, as opposed to the surviving tenant in common, would be deemed to have acquired the deceased’s portion of the account at FMV.
