Canadians are familiar with the concept of joint ownership with right of survivorship. It is the prevalent form of ownership between spouses. Therefore, it is not uncommon for Canadians to own U.S. real property or other U.S. property, jointly, especially between spouses. Many are of the view that it will simplify the estate plan and succession of the U.S. property to the surviving owner yet, few understand the U.S. estate tax implications governing joint ownership with right of survivorship.

It is worth noting that section 2040 of the U.S. Internal Revenue Code governs joint ownership with right of survivorship for U.S. estate tax purposes. Prior to examining the tax implications, let’s review some key preliminary questions that ought to be considered:

• Are we dealing with joint ownership with right of survivorship or co-tenancy in common (referred at times as “joint ownership without right of survivorship”)?
• Are the joint owners spouses?
  • Are they married or common law?
• Are both owners U.S. persons or is one owner a U.S. person or are both owners non-U.S. persons? (each scenario has different U.S. tax considerations).

Answers to the above questions will dictate the governing rules for estate tax purposes.

Joint Ownership – Non-U.S. Persons

If both owners are Canadian (i.e. non-U.S. persons), on the death of one of the owners, the “tracing rule” is the governing authority as to the amount to include in the deceased owner’s estate for U.S. estate tax purposes.

Essentially, the Internal Revenue Service (IRS) takes the position that the full value belongs to the deceased unless the other owner can provide evidence that it furnished some consideration at the time of purchase (this is referred to as the consideration furnished rule[1]). Ideally, the surviving owner would have documentary evidence confirming they contributed to the purchase. Without any documents available, the full value of the property is included in the value of the deceased’s estate regardless of whether they had contributed little to the purchase price.

[If both owners are married U.S. persons, the governing rule is the “qualified joint interest” where it is deemed that only one-half of the value of the property is to be included in the estate regardless of the consideration furnished at the purchase of the property.]

Snowbirds, Joint Ownership, and U.S. Probate

At times, clients have an adult child on title as a joint co-owner of their U.S. real estate property to avoid the property forming part of the estate (thus, avoiding U.S. probate). There is also an erroneous belief that U.S. estate tax is avoided since the property vests to the surviving owners.

Other than the misconception that the U.S. estate tax is avoided (because of the tracing rule), such an ownership arrangement can also add additional cross-border issues to the adult child; notably T1135 filing and potential U.S. tax filings on the sale of the property.

Conclusion

When clients advise they own U.S. property jointly, advisors need to enquire about the details of the ownership in order to provide adequate advice concerning the application of the U.S. estate tax.

[1] §2040(a)