Special thanks to Murray Paszko, CFP, FCSI, TEP, Manager, Trust & Estate Services at Servus Credit Union in Edmonton for contributing this article, originally published in a Concentra Trust bulletin on April 11, 2014.
Many people have concerns regarding their estate having to go through probate. As a result, they reregister their assets in joint names, usually with their children as an estate planning strategy. In solving one issue, they may have unintentionally created other consequences, such as tax issues. In some cases, the tax liability on both the original owner and intended joint owner may be more costly than probate itself.
In certain circumstances, CRA views the transferring or re-registering of capital assets, e.g. real estate, securities, etc., from sole ownership to joint ownership, as a deemed disposition by the original owner at the asset’s fair market value at the time of transfer. This is considered to be a sale even though no cash or consideration was exchanged. This could result in an immediate and unexpected taxable event back to the original owner on any accrued gains on the asset. Another concern is not having the cash available to pay the tax.
The person to whom you transfer capital property will also be liable for capital gains tax upon the future disposition of the capital property based on the value of the asset on the date of transfer.
In some jurisdictions, it could also generate a land transfer tax on the real estate, even on the principal residence. It should be noted that the above tax consequences, except for the land transfer tax, do not occur when the original owner names his or her spouse as the new joint owner. Such transfers between spouses can be done at the adjusted cost base of the transferred property instead of its fair market value.
It is also important to document whether the joint owners are legal owners or beneficial owners, or both. This will also determine the tax implications. A legal owner only has legal ownership but does not have any benefits from the account, e.g. shares in the revenue or enjoyment of the property. A beneficial owner, enjoys the benefits and revenue from the asset, and is not required to have legal ownership, but in most cases, is the legal owner as well.
Confusion can arise on who should be reporting the income from the asset, whether it should be reported by the beneficial owner or the legal owner. In a estate situation, when the beneficial owner has passed away, additional confusion can arise on who is the beneficial owner and the legal owner, especially when it comes down to something as simple as the cash in a bank account, and a dispute may arise within the beneficiaries of the estate.
Although making your assets joint may allow you to avoid probate, it is important to consult a tax and legal advisor to review the potential risks as well as the costs/benefits of the strategy. It would be disappointing to find out that your savings regarding probate is minimal compared to the unforeseen tax as well as any family conflict amongst the beneficiaries of your estate.
Note: Readers are cautioned not to act on information provided without seeking specific advice with respect to the particular situation.
Concentra offers personal trust services to credit unions through Concentra Trust, a wholly owned subsidiary of Concentra Financial Services Association.