Written by Sandy Cardy, Vice President Tax and Estate Planning,
Mackenzie Financial Corp
A Companion Advisor article

I have had quite a few calls over the last couple of months on the subject of joint tenancy. Each case involved a client of Mackenzie who was considering transferring sole ownership in an asset into joint tenancy with right of survivorship. In almost every case, this was being contemplated because, among other things, the client wanted to avoid probate fees. (Bear in mind, probate fees are not an issue in some provinces, such as Alberta and Quebec).

The CCRA has generally indicated in technical opinions that a transfer to a joint tenancy gives rise to a disposition of property. Many of your clients will be unaware of this disposition and the potential resulting tax consequences. We need to help our clients be cognizant of both tax and legal issues.

1. Tax Issues

(a) Deemed Disposition

If a transfer includes items of a capital nature, there may be a deemed disposition on that portion of the asset transferred into joint tenancy with an individual (other than the individual's spouse).

This is best illustrated with the following example, which is an excerpt from a 1997 CCH Tax Bulletin:

Margaret, a 70-year old Ontario resident, had calculated that probate fees of nearly $30,000 would be payable on her estate. Unhappy with this prospect she conveyed a joint interest in an investment valued at $400,000 to her son. Margaret correctly reasoned that this would reduce the probate fees that would eventually be payable because, upon her death, her interest would pass to her son; outside her will, by right of survivorship.

Margaret failed to consider the deemed disposition rules of the income Tax Act. When property (other than a principal residence) is transferred to another person (other than one's spouse), a disposition is deemed to occur at fair market value, and any accrued gain is taxable in the year of disposition. Margaret had originally purchased the investment in question for $100, 000. There was, therefore, a $300,000 gain. Being deemed to have disposed of half the property, Margaret was liable for capital gains tax an three-quarters of the $150,000. At a tax rate of 50%, that amounted to approximately $55,000 or about $50,000 more than this scheme saved her in probate fees. And, of course, the savings on probate fees is not realized until the year of death.

(b) Income Attribution

Where an asset is transferred into joint tenancy with a spouse or child at an adjusted cost base, it may be subject to the attribution rules.

2. Legal and Other Considerations

Beyond the tax implications, there are a host of other factors your clients need to consider before property is transferred into joint tenancy. The following are some examples:

• Where an interest in real property which is subject to a mortgage is conveyed, land transfer tax may be payable. The property transferred may become subject to the creditors of the transferee.
  
  
• Where an interest in property is transferred to a married person and that person later divorces, the interest transferred may be included in the transferee's net family property and may be subject to an equalization order or Subject to division of property.
  
  
• A person with children from a previous marriage may wish to provide for his or her current spouse and also the children from the previous marriage; however, if the bulk of the estate has been put into joint tenancy, that property will pass automatically to the spouse and ultimately be disposed of according to his or her will. As a result, the transferor's children may not receive anything.
  
  
• If the property in question is a principal residence and the transferee does not live there, one-half of the principal residence exemption will be lost for years after the transfer.
  
  
• Opportunities for post-mortem income splitting using testamentary trusts will be lost if the deceased's entire estate passes by right of survivorship to a joint tenant. Where property is transferred into a joint tenancy with a child, the child's consent may be necessary to subsequently mortgage or sell the property. Furthermore, the parent may not be able to recover the transferred interest without the child's
  consent.

This article should not be construed as legal or tax advice, as each individual’s situation is different, thus consultation with your own legal or tax professional is advised.

Notice: Fiscal Agents Financial Services Group are not engaged in rendering tax, accounting or legal professional services or advice. The comments in this article are not intended, nor should they be relied upon, to replace specific professional advice. Before acting on material contained herein. Readers should seek advice that is appropriate to their personal circumstances from a professional advisor.

The information in is article is subject to change, therefore be advised its content should be viewed as illustrative to the context of the article. Income tax laws change over time therein rendering certain numbers quoted obsolete. Please consult current tax rules or directly at CCRA

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