The potential pitfalls of using joint ownership of property between parent and adult child as a means of reducing exposure to estate administration tax has received increased attention in recent years, in particular since the Pecore decision. Nevertheless, it is still common (likely the norm) to see parent-adult child joint ownership arrangements where the parent’s intention regarding the beneficial ownership of the asset is not documented. Estate solicitors involved in the administration of estates, and our litigator colleagues, know all too well the disputes that can arise when there is uncertainty in this regard. Did the parent intend the adult child to hold the asset on resulting trust for the parent’s estate, or did the parent intend to make a gift to the adult child?

In an article entitled “Joint Ownership Not as Simple as Most Believe”, which appeared in a recent edition of The Canadian Taxpayer[1], the author refers to an interesting CRA letter[2] (the “Ruling”) that responds to an enquiry from a taxpayer regarding the tax treatment of a joint investment account. The taxpayer’s mother died in 2014, leaving a will that divided the estate in equal shares between the taxpayer and another person. Certain shares held in an investment account were sold after the mother’s death with the intention of dividing the net proceeds. The taxpayer wrote to the CRA to ask how the capital gain arising on the sale of the shares should be reported and by whom.

At the time of the mother’s death, the investment account was jointly owned by the mother and the taxpayer. The taxpayer advised the CRA that the taxpayer had been added as a joint account holder and “that these holdings were not 50/50 as to ownership.” The CRA’s response was clear: “It is our view that your enquiry is not a matter of income tax legislation interpretation but rather requires a legal determination of property ownership.” The CRA also confirmed that it “does not issue rulings on the interpretation or application of common law or Provincial trust legislation. Income tax consequences arising from the deemed disposition of property upon the death of an individual will only occur where the deceased had legal and beneficial ownership of that property.” To paraphrase: sort out the ownership of the property first, and then come to talk to us.

The Ruling goes on to provide a nice summary of how the capital gain might be reported in two scenarios:

1. If the mother is the beneficial owner of the entire joint investment account, and the taxpayer is a nominee only (i.e. holds bare legal title but is not a beneficial owner), then there was a deemed disposition of the entire account on the mother’s death, and any capital gain or loss from the deemed disposition is reported on the mother’s terminal return. Any gain or loss from the subsequent actual disposition of the shares would be reported by the estate on a T3 return.
2. If the taxpayer was a legal and beneficial owner, along with the mother, of the joint investment account, the deemed disposition on the mother’s death would only apply to the portion of the account that the mother beneficially owned, with any gain or loss from the deemed disposition of that portion only being reported on the mother’s terminal return. Upon the subsequent actual disposition of the shares, the taxpayer would report any gain or loss from the portion the taxpayer beneficially owned on the taxpayer’s T1 return, and the estate would report any gain or loss from the portion the mother beneficially owned on the estate’s T3 return.

The above taxpayer’s question underscores the particular perils of adding an adult child as a joint owner of an appreciating asset. Without certainty as to the beneficial ownership of the asset, you cannot determine how any gain or loss from an actual or deemed disposition of the property should be reported for tax purposes. We don’t know what steps the taxpayer ultimately had to take in order to determine the beneficial ownership of the investment account. However, it is likely safe to assume that neither the mother nor the taxpayer appreciated the complexity of the arrangement when the taxpayer was added as a joint owner on the investment account. And, of course, the entire issue, and related expense, could have been avoided if the mother’s intention with respect to the beneficial ownership of the account had been documented at the time the taxpayer was added.

Happy documenting!

 

[1]       “Joint Ownership Not as Simple as Most Believe”, Arthur B.C. Drache, C.M., Q.C., ed., The Canadian Taxpayer (Toronto: Thomson Reuters), August 26, 2016, Vol. xxxviii, No. 16, at p. 126.

[2]       CRA Views, 2015-0580531E5, June 10, 2015.