Death and taxes. While your lawyer can do little in helping you to avoid the first inevitability, clients often pay top dollar to their lawyer in exchange for their help minimizing their tax liability upon death.
What Is Joint Tenancy?
One of the most fundamental tools available to avoid estate administration taxes (colloquially called probate taxes) is adding an intended beneficiary as a joint owner on title – specifically as a joint tenant with right of survivorship. In layman’s terms, joint tenancy means that upon the death of one of the owners, the remaining owner generally becomes the sole owner of the property without the need to pay probate taxes.
However, while certainly a fundamental tool, joint tenancy is also a blunt instrument that has the potential to result in unintended and costly consequences if not coupled with careful planning.
Trusts and Control
When adding an intended beneficiary to title, it is imperative that the original owner express in writing their intended purpose. In Canada, the law presumes (with a few exceptions) that when an owner gratuitously transfers interest in a property, the transferor does so with the intention that the transferee hold the interest in trust for the benefit of the transferor, unless the transferee can prove otherwise.
While this presumption may serve to protect the vulnerable, it can have grave consequences for the poor planner. For example, Cheyenne adds one of her adult sons, Oscar, on title to a property as a joint tenant. She does not record her intentions in writing, but instead tells Oscar that she wants him to have the property upon her death. Unless Oscar can prove that Cheyenne intended a true gift, the law will presume he is holding his interest as a trustee for the benefit of Cheyenne and not as a true owner.
Transferor and transferee should also discuss control of the property during the transferor’s lifetime, and whether the transferee will have any right to sell their interest unilaterally. The conclusion of this discussion should also be in writing and signed.
Gratuitously transferring a property to an intended beneficiary is a taxable event, usually resulting in capital gains to the transferor. Assuming the transfer occurs for free, without any consideration from the transferee, the general rule of thumb is that the transferor is deemed to have sold the transferred interest at fair market value during the year of transfer. However, there are several tools which may be available to eliminate or postpone these taxes for the transferor (e.g. principal residence designation or spousal rollovers). If these tools are unavailable to the transferor, they may find that they have incurred steep taxes with no proceeds of sale from which to pay the taxes.
Even if the addition of a joint owner does not result in immediate tax consequences for the transferor, the transferee should be equally mindful of the tax consequences which would occur on a future sale.
Exposure to Third Party Claims
Even if the transferor has memorialized their intentions in writing and sought professional advice on income taxes, adding someone to title as a joint tenant may result in the property being exposed to third party claims during the life of the transferor. Consider for instance, how an eager creditor or smarted spouse may seek payment of an outstanding debt or an equalization payment from the transferee’s assets. Spouses, moreover, are afforded special rights in the context of the matrimonial home which may result in its inclusion in the net family property of the transferee, and even undo the joint tenancy under certain conditions.
At the end of the day, the desire to avoid probate fees will need to be balanced against the following goals:
- Minimizing income taxes,
- Being fair to potential beneficiaries,
- Avoiding conflict, and
- Protecting the property against creditors.
Seeking the advice of a lawyer is a crucial part of not only determining whether adding a loved one on title is worth the risk, but also making sure that your plans are as protected as possible.
For more information, please contact Hummingbird Lawyers LLP. Our team is always available to help.