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Joint Ownership – Understand the Risks and Benefits

As we age, we try to make life easier for both our families and ourselves. Many seniors transfer assets to joint ownership in order to avoid income taxes, but this is unlikely to succeed. You should think carefully before transferring assets to joint name, particularly if it is someone other than your spouse. Things that seem simple can sometimes create complications. This article is about “joint ownership with right of survivorship,” where you assets will normally go to the other owner(s) upon your death.  Sometimes, assets, such as your home and other real estate, are held in both names as “tenants in common,” and while the name on the title may be similar, the rules are completely different.  If you own 50% of a property as tenants in common, your ownership is transferred to your beneficiaries according to your Will, not to the other owner.

If a property is subject to income taxes when you sell it, a change to joint ownership with anyone other than your spouse may trigger immediate taxes. For example, assume you own your cottage only in your name. If you do not claim your cottage as a principal residence, then placing the cottage in joint name with one child would be treated by the Canada Revenue Agency as if you sold one-half of the property. If the property increased in value after you built or bought it, then you will have taxes to pay on the gain. The other half of the gain will be taxed in the future when the cottage is sold or is given to your child, or upon your death.

Putting a bank account in a joint name will not trigger any taxes because there would have been no gain in value over the original deposit.

Remember how I said that transferring an asset to joint name could lead to more complicated issues? Let us use the bank account as an example. Assume you have several children, and you put your daughter on your bank account as joint holder. Why did you do this?

  • Did you intend to transfer one-half of the bank account balance to that child now instead of later? If so, is it an early inheritance and does it reduce the amount she is entitled to through your Will?
  • Were you only doing this for convenience so that she could help you with your banking? If so, do you have several children? Do you plan to give each of them an equal share of your assets when you die? How do you wish this bank account handled at that time?
  • After your death, a joint owner will normally get ownership of that bank account. If you have $100,000 in the bank account, do you think your other children would question whether that daughter should be entitled to all of the money? Was it an additional gift or should her share from your Will be reduced to treat all children equally?

Be clear, in writing, when you transfer accounts to joint name to avoid such problems. There is a difference between transferring the “beneficial ownership” of a property and simply putting a property in joint name for “convenience” with no real change in ownership intended.  But, you cannot expect to have the best of both worlds – if it is for convenience only, then you will pay probate costs at death because the property will still form part of your estate to be governed by your Will.  Alternatively, if you have transferred beneficial ownership, then you will avoid probate, but the property will be subject to any immediate income tax consequences and will eventually be transferred to only the joint owner on your death.  Speak to your lawyer about this. If you do not have a lawyer (and if you have no Will and Power of Attorney), in PEI, you can call the Community Legal Information Association of PEI www.cliapei.ca to obtain a lawyer referral.  Other provinces also have public legal information associations that may offer this service.

The positive side of joint ownership is the ease of transfer upon death. Probate fees are avoided because your Will is not involved. Probate fees in Prince Edward Island are about $400 for each $100,000 of assets ((as of August 2018), but much higher in most provinces (e.g. as high as 1.5%). Executor fees may also be avoided. Executor fees often apply to the assets flowing through your Will and can typically be 3% to 5% of your assets. Certain lawyer’s fees are also based on the value of your assets.  When a Will is probated it becomes a public document – anyone can read it. This is why the use of joint ownership also keeps things private.

There are some other serious downsides to think about when transferring something to joint ownership. For example, you could suffer serious financial losses if the other person has personal or business problems, gambling or addiction issues, is sued, or goes through a divorce.  For example, if you own your home jointly with someone who declares bankruptcy, you could lose at least one-half of your home to the creditors.  If your bank account is in joint name, the other person could spend all of the money without you being made aware.

If you need help with day to day banking and payment of bills, instead of using a joint bank account (or giving someone your credit card and personal identification number, which would make you personally liable for any fraudulent use), make a Power of Attorney.  Giving someone a Power of Attorney to act on your behalf can be done for specific purposes, and that person can be held legally responsible if they do not act in your best interests.  This will be much safer than giving someone joint ownership.  In P.E.I., you can prepare your own Power of Attorney using a do-it-yourself kit from the Community Legal Information Association of PEI ($20 at time of writing), but the cost by a lawyer should also be quite reasonable.

It is important to understand all the possible consequences and get advice based on your situation.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum