Joint Tenancy Trap
My mother recently told me that she wanted to transfer her home into joint tenancy with me and my brother to avoid taxes upon her death. Someone at her work had told her that if she didn’t do this, we would have to pay significant tax on the value of the house if we received the property through her Will.
Transferring a home into joint tenancy is a common strategy, often done to avoid probate fees. If you own property with another person as tenants in common, on your death your interest in the property becomes part of your estate to be passed on according to your will. If you own property with another person as joint tenants, on your death your interest in the property passes to remaining joint tenant(s) by right of survivorship. It does not form part of your estate and therefore you do not have to pay probate fees on the value of this property.
Couples often hold property in joint tenancy, however parents are increasingly using this option to pass the asset to their children upon their death. However, this can result in some unintended consequences, some of which are set out below.
- The parent cannot later cancel the transfer if she changes her mind. A child can later attempt to force a sale of the property through the Partition Act, to receive their share of the house prior to the parent’s death.
- The parent will not be able to sell or mortgage the land unless the child also signs.
- The transfer is considered a disposition for income tax purposes. The 50% interest in the property transferred to the child is deemed to have been sold at its fair market value and, unless the asset is the parent’s principal residence, a portion of any capital gains will be added to the parent’s income.
- One-half of any future capital gains will accrue to the child. If the property is the parent’s principal residence and the child lives elsewhere, the principal residence exemption will be lost for the child’s share of any future increase in value of the home.
- Property transfer tax will be payable at the time of transfer, although there may be an exemption available if the property is the principal residence.
- The child’s interest in the property will be subject to claims by the child’s creditors.
- If the child is married and the property is used for a family purpose, it could be subject to claims by the child’s spouse if there is a breakdown of the child’s marriage.
- If the parent transfers the property only to one child, but there are other siblings, this could result in a dispute over the asset if the parent’s intention was not made clear. The other siblings would argue that the child holds the property in trust for the estate, and that it was not intended that they should receive the property by right of survivorship.
If you are still considering putting your home into joint tenancy with one or more of your children, you should be very clear about your wishes. If you intend that child to take the property absolutely upon your death, you should execute a deed of gift. Conversely, if you want that child to hold the property in trust for the estate and to share its value with their other siblings, this should be clearly documented in a trust declaration.
Finally, it should be noted that the Canada Customs and Revenue Agency has said that the existence of a declaration of trust will not, in and by itself, be conclusive evidence that beneficial ownership of the property has not changed. It depends on all of the circumstances. If legal title to an asset is transferred from a parent to the parent and a child, but beneficial ownership remains with the parent, a disposition for income tax purposes has not actually occurred. As a result, the CRA takes the position that where no transfer of beneficial ownership as occurred, the value of the property should be included in the probate application and probate fees should be payable. In other words, if the child is holding the home in trust for the estate, and it will be distributed in accordance with the will, then the full value should be included in the application for probate. This fact likely negates the point of placing the asset into joint tenancy to avoid tax, unless there are other reasons for the parent to want to do so.
As always, if you should speak to a lawyer who can provide you with specific estate planning advice before taking any steps.
Thanks for Reading!