RE-EXAMINING JOINT OWNERSHIP IN YOUR ESTATE PLAN
Originally published on December 28, 2006
I am a big fan of the principle called “Ockham’s Razor”. William of Ockham, a medieval philosopher and thinker claimed that if we have to choose between two competing solutions which appear to generate the same result then it is reasonable and prudent for us to choose the solution which has the simplest form.
Owning property in joint names or more specifically “joint tenants with right of survivorship” or JTWROS for short, has been implemented in several estate plans largely due to its inherent simplicity. Upon the death of one of the joint owners, the property passes directly to the surviving owner and does not pass through the estate. Since the assets pass outside the Will, their value does not form part of the estate and may be excluded from the calculation of applicable probate fees, which are based on the value of the assets that pass under the Will.
Property owned jointly with children can often prove not to be such a simple estate plan. A question of the parent’s intent is certain to arise, particularly when little or no consideration is paid by the child. Did the parent make a gift of an interest in the property or was title transferred into joint names simply as a tool of convenience to allow the child to manage funds or pay bills for an elderly parent or simply to avoid probate fees?
There is considerable litigation on this question. This month the Supreme Court of Canada will rule on two Ontario Court of Appeal decisions in Pecore v. Pecore (2005 CanLII 31576 (ON C.A.)) and Saylor v. Brooks (2005 CanLII 39857 (ON C.A.)). In both of these cases, at the provincial court level, the Judges reached differing conclusions as to the parent’s intent based on similar facts and evidence.
If the parent’s intent is not properly documented then speculation, angst and tension among the beneficiaries can fuel a firestorm. For this reason, I thought we should take a closer look at some of the issues surrounding joint ownership, using its most common form, farmland.
Parent’s intention – to make a gift
If your intention is to make a gift of an interest in your land to your child then you should document the transfer with a Deed of Gift. For example, if title is transferred from parent to the parent and child as JTWROS then the parent will be considered to have disposed of a one-half interest in the farmland. This disposition must be reported on the parent’s income tax return. The resulting tax consequence to the parent will depend on whether or not the farmland qualifies for rollover treatment under subsection 73(3) of the Income Tax Act. If not then the parent would be deemed to have been transferred to the child at fair market value against which the parent could apply his or her capital gains exemption.
If the child is not registered for GST purposes then the parent must collect and remit GST on the transaction.
If the child gets into financial difficulty or the interest in the joint property becomes subject to matrimonial division then the creditors can force a sale of the interest to meet the demands of creditors.
Parent’s intention – a tool of convenience
If the intent is to retain beneficial ownership of the property until the parent’s death then it should be clearly documented. Most lawyers will advise you to
complete and sign a Declaration of Trust. Under this arrangement, the child is effectively holding legal title on trust for the parent. During the parent’s lifetime, the child is obligated to do as the parent directs. Since the child holds title in a resulting trust, the parent is able to designate who will receive beneficial ownership of the property. If it is the parent’s intention for the child whose name is on the title to receive the lands upon the parent’s death then the parent’s Will should confirm the bequest.
Since beneficial ownership has not changed, there is no disposition for GST or income tax purposes. All revenues received from the lands, even though title is in joint names, will be reported by the parent.
Is a principal residence involved?
If a parent transfers property that involves his or her principal residence into joint names then the tax exempt status, realized by designating your residence as your “principal residence” may be affected.
Let’s use the example of mom who resides on a subdivided ten acres and who decides to transfer title to her acreage into joint names with her child. Child does not live with mom, who continues to live on her own. A few years later, mom moves to a level care facility and decides to sell her acreage. Mom’s 50% interest will continue to be exempt from tax by virtue of it being designated as her principal residence. The child’s 50% interest will be subject to tax on any capital gain, if applicable, since the child did not “ordinarily inhabit the property”, thereby failing to meet definition of principal residence as defined in section 54 of the Income Tax Act.
What happens if the child dies first?
Preliminary planning surrounding JTWROS quite often fails to consider the consequences of an estate plan should the child predecease the parent. In this situation, any parent-child JTWROS properties would revert back to the parent who is the last surviving owner.
Dad transfers title to a quarter-section to himself and his son. Newly married, the son decides to build a house on this land that he owns with his dad, since his dad’s residence, farm shop, barn and buildings are also located on the same quarter. Seven years later son is diagnosed with a serious health problem. He wants his wife and children to have certainty regarding his estate should something happen to him. Dad is elderly and is resisting any change to the ownership arrangement.
Son is even more surprised when he is told that his wife’s homestead or dower rights do not apply to land held jointly. Son regrets his decision to build his home on the jointly-owned quarter-section.
In closing, if you decide to use joint-ownership in your own estate plan then please be sure to document your intention clearly with either a Deed of Gift or Declaration of Trust. Second, while you should consider the costs of probate fees in your estate plan, they are relatively small compared to the costs associated with unnecessary tax or a Court sanctioned judgment on your child’s interest due to matrimonial division or from your child's creditors.
Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at firstname.lastname@example.org or website www.hth-accountants.ca. All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.