The benefits of joint property ownership as an estate and probate planning strategy are well known; property vests to the surviving owner(s) on death thus, bypassing the estate and avoiding probate fees. In the right circumstances, joint ownership works great and facilitates the succession of the property.

However, what may be overlooked are the potential unintended tax consequences associated with joint ownership.

Joint Ownership: Legal vs Tax

For legal purposes, joint tenancy is a form of ownership where the co-owners hold the property as a unified and undivided whole such that each holds an equal interest in the property. In some jurisdictions, joint ownership creates a right of survivorship where the interest of a co-owner, upon death, passes to the surviving co-owner(s).

For tax purposes, joint owners are deemed to have an equal interest ownership in the asset. This means the owners have a proportionate interest ownership (not a unified and undivided interest). The tax perspective can create some odd tax outcomes that should not be overlooked.

Joint Ownership – Adding a Spouse on Title

Generally, adding a spouse on the title as a joint owner of a capital property is done at the adjusted cost base therefore, no taxable capital gain or capital loss is triggered when a spouse is added to the title.  However, any future income or capital gain will be attributed back to the original spouse owner.

Tax Considerations – Adding Someone Other Than a Spouse

The tax considerations associated to joint ownership with someone other than a spouse (legal and beneficial ownership) may be best explained by way of an example:

• John has three children; two daughters and a son.
• John has a cottage with an adjusted cost base (“ACB”) of $100,000 and a fair market value (“FMV”) of $500,000. 
• Both daughters use the cottage and are interested in one day owning the cottage.
• John’s son lives in another province, never uses the cottage and thus, has no interest in the cottage.
• John was advised that it would be wise to add his two adult daughters as joint owners of the cottage to avoid probate fees on his death and for the cottage to vest to the daughters. 
• On June 1^st, John adds his daughters on title as joint owners (with equal legal and beneficial rights). 

By adding the daughters on title as joint co-owners (both legal and beneficial interest), John is deemed to have disposed of two-thirds of his interest in the cottage at fair market value for tax purposes. Consequently, John must report a capital gain on his tax return and pay the associated tax (yet John has not received financial compensation).

Also, on the death of John, the cottage will vest to the surviving owners by way of survivorship. However, for tax purposes, John is deemed to have disposed of his one-third interest in the property at fair market value and taxes on the resulting capital gain will have to be paid by the estate. For estate purposes, such a scenario may be problematic since the cottage vests to the surviving co-owners, yet the taxes must be paid by the estate.

To save probate fees (1.5% in Ontario), John added his two daughters on the title as joint co-owners triggering a capital gain in the year of transfer and on his death. The cottage vests to the daughters yet, taxes on the capital gain (on John’s one-third ownership interest) must be paid by the estate. Such an outcome can deplete the value of an estate to the detriment of other beneficiaries (i.e. the son).

The above example focuses on the cottage, but one can think of other properties where such a strategy is suggested such as investment accounts and the principal residence.

One argument commonly heard is the daughters’ ownership was held as a resulting trust; i.e. only the legal ownership was transferred but not the beneficial interest thus, there was no disposition for tax purposes when adding the daughters on title. It’s a fair argument, but one should review the provincial rules concerning probate as such an “arrangement” may not avoid probate. In other words, one cannot have it both ways.

Estate advisors who propose adding another individual, especially someone other than a spouse, as a joint co-owner must consider the tax implications of such strategy. When properly planned, this strategy can be quite helpful. If the potential tax implications are overlooked, the result may be unfortunate to the original owner, the estate and/or the beneficiaries of the estate.

*** My next article will consider joint ownership and U.S. tax.