The Companion Advisor:
Taxes & Estates
Tax Talk Joint Tenancy
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:
This article should not be construed as legal or tax
advice, as each individuals situation is different, thus consultation
with your own legal or tax professional is advised.
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