Benefits and pitfalls of joint ownership

Dianne Szelag Finance
Dianne Szelag
Finance

Normally spouses hold most of their property jointly with the other spouse with a right of survivorship – “a contract,” the law books say, “between two or more parties specifying their simultaneous ownership of some form of real or personal property, such as a house, land, or money.”

This is the most tax and cost effective means of transferring property on the death of either partner. Probate fees are avoided as the property is not distributed under the will and passes outside of the estate. Income tax is avoided on death; normally it would pass with deferred tax consequences to a surviving spouse.

However, after the death of one partner, the surviving partner may want to share ownership of some of the property with one or more of their adult children. This can present many problems.

Issues can arise, first of all, if there are siblings. Often a bank account is set up jointly with one child to simplify bank transactions for an aging parent. The parent does not intend to leave the bank account solely to that child on his death, but the normal effect is that this one child would automatically gain possession of the account when the parent dies.

However, in the case of such joint accounts the law gives the parent another possible option, stating simply that the joint owner “may take ownership of the account over other beneficiaries.” By specifically stating in the will his or her intent to leave that account to the estate, the parent can hope to avoid the undesired consequences.

Other problems can arise where an unscrupulous child may start to drain the account while the parent is still alive; or a child may be unable, perhaps unqualified, to properly manage the parent’s financial affairs.

If the parent intends to continue to report income then, for tax purposes, his or her name and social insurance number should be the first such number recorded on the account. The location of the parent’s SIN on future tax slips can have real financial consequences, as indicated below.

Placing property with accrued capital gains into joint ownership can attract the attention of Revenue Canada. The revenue agency considers the action a partial disposition of the property at fair market value, making the parent liable for tax on accrued capital gains applying to half the market value of the property.

This situation often arises in the case of vacation property transfers. CCRA regularly trolls land titles for evidence of such dispositions. It may be a nasty surprise to the parent who learns a large tax bill is pending.

That situation can also occur with respect to investment portfolios; here, a tax problem can be avoided if it can be clearly demonstrated the property is being held in trust for the parent in preference to being split. However, in this situation the family may still run into flack with CCRA, which may challenge any such ruling. The case is one where it can be critical to have the parent’s SIN attached first to such accounts.

There are also occurrences where one child has convinced a parent to sign over property without the knowledge or consent of other siblings. The action may not be discovered until the parent dies, and the resulting situation can bring on undue grief and conflict in the disposition of the estate.

The principal residence should not be treated as joint property. Such – an arrangement will cause the family to lose the “principal residence” exemption on half the property.

Another point of vulnerability: joint property is exposed to claims of creditors of all the joint owners, as well as being exposed to marital breakdown dispositions because for married individuals joint property is considered marital property.

Dianne J. Szelag is a financial advisor with IPC Securities.

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