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  The Companion Advisor: Taxes & Estates
Joint Accounts

The convenience of holding assets jointly has led to the increasing use of joint accounts as a means of transferring wealth between spouses or partners or to successive generations with little or no financial or administrative consequences. However, advisors should exercise caution before recommending that their clients put property into joint ownership.

Joint tenants with rights of survivorship

The most common form of joint ownership is joint tenants with rights of survivorship or JTWROS. The Canada Customs and Revenue Agency (or CCRA) assumes jointly held accounts are JTWROS unless proven otherwise. Joint tenants with rights of survivorship provides two or more persons with simultaneous rights of ownership of an account. Each joint owner has an undivided and equal legal interest in the account. In addition, each joint owner often also has an undivided and equal beneficial interest in the account. Upon death of one joint owner, the deceased's interest in the account terminates, leaving the surviving joint owner(s) with full ownership, despite any attempted disposition in the deceased's will.

Why joint ownership?

There are two common reasons given for registering an account as joint ownership. The most common reason is the minimization or avoidance of probate taxes as assets held in joint name transfer outside of the estate and are therefore not included in the value of the estate for probate tax purposes. The second reason is ease of administration of the account. Many investors, particularly elderly parents, are placing their investment accounts into joint names with their adult children to facilitate dealing with the account in the future.

Dangers of jointly held property

Before placing accounts in joint names, there are some potential risks that need to be taken into consideration. Firstly, a transfer to someone other than a spouse or partner may trigger immediate capital gains tax. Secondly, a transfer of property generally means not only a loss of control over the property but quite often the inability to make decisions relating to the property without the consent of the joint owner. Assets held in a joint account may form part of creditor proceedings if one of the joint account holders becomes insolvent or declares bankruptcy. In addition, there is potential for real conflict upon the death of the parent, where only one child is registered as a joint owner. When the parent dies, the child becomes the sole owner of the account, which may lead to a dispute with other siblings or family members who believe that they should have a claim on the jointly held account. Finally, if the account was transferred to an adult child, it may also become open to division upon marriage breakdown of the child and his or her spouse.

If personal residences are involved, the dangers are even greater because each co-owner of the property may jeopardize his or her access to the principle residence exemption, as well as his or her eligibility as a "first time home buyer" for purposes of participation in the Home Buyers' Plan.

Deemed disposition & capital gains

Deemed disposition & capital gains Under the tax rules, a "disposition" occurs when there has been a change in "beneficial" ownership as opposed to a change in legal ownership. In determining whether each joint owner has beneficial ownership, a number of factors should be considered:


Whether the account was owned by one of the joint owners prior to making it a joint account;

Evidence of the transferor's intention to gift the account to the transferee (e.g., via the will);

Whether the income was used jointly rather than for the sole benefit of the transferor;

If the income generated by the account was reported jointly rather than solely by the transferor; and

Whether the transferee actually exercised control over the account prior to death of the transferor.

Where the legal owners have beneficial ownership, each joint account holder is equally responsible for the tax liability. Each must report earnings based on his or her proportionate ownership, except where the attribution rules apply. In addition, the CCRA has consistently taken the view that the transfer of property solely owned by a taxpayer into a true joint ownership arrangement (one in which beneficial ownership has changed) would result in a disposition of the proportionate interest that is being transferred to the transferee(s) other than a spouse or partner.

Conclusion

In many cases, whether or not joint accounts are advisable for estate planning purposes will depend on the client's desire to focus on saving probate taxes or deferring income taxes. Some exceptions to this trade-off exist if the account was registered jointly from the start so that no capital gains tax is payable upon the transfer or when the owner faces a capital loss at the time of the transfer to a joint account. Finally, investors should remember that a transfer into joint names generally results in a loss of control, which may not be the desired intent.

GETTING ADVICE: Investing requires careful planning to ensure all essential matters are covered. It strategies should be reviewed periodically and discussed with a qualified adviser or team of advisers to incorporate any changes in your personal circumstances.

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.

We gratefully acknowledge the contribution of this article from AIM Funds Management Inc.
Joint Accounts - FORUM - March 2002

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Taxes and Estate Planning