Last week my colleague, Laura West, spoke about some of the non-tax pitfalls that can arise when transferring property into joint tenancy with a family member. This week I’m here to follow-up with a discussion of the tax implications that should be considered before changing ownership of property to joint tenancy.
(i) Acceleration of Tax
While it is possible to reduce the value of an individual’s estate for probate tax purposes by changing ownership of property into joint tenancy, doing so is considered a disposition for income tax purposes. A transfer of property in a non-arm’s length situation may give rise to immediate tax consequences if the property being disposed of is capital-property or inventory and assuming the new joint owner is not the spouse of the original owner. Canada Revenue Agency takes the position that the original owner has disposed of one-half of his or her interest in the property for proceeds equal to 50% of the fair market value of the property with the cost of the property being 50% of the cost paid by the original owner for the entire property; any accrued capital gains and recapture of capital cost allowance will be deemed realized. Further, notwithstanding that on death the right of survivorship results in the surviving joint tenant owning the entire property and not a partial interest in the property, on the death of the original owner he or she will be deemed to have disposed of the 50% interest retained by him/her; again, any accrued capital gains and recapture of capital cost allowance will be deemed realized.
(ii) Attribution Rules
The transfer of property to a spouse or related minor either directly or indirectly brings into play a consideration of the possible application of the income attribution rules.
While a transfer of property to a spouse either outright or in joint tenancy can be effected on a tax-free basis, any income or loss or capital gains or capital losses of the spouse from the property or from property substituted therefor is deemed to be that of the transferor.
If an interest in property is transferred directly to a person under the age of 18 years and who does not deal at arm’s length with the transferor or is a niece or nephew of the transferor, in addition to possible tax on the disposition of the property, there is attribution of income and losses (but not capital gains or losses) back to the transferor while the transferor is alive and a resident of Canada and the transferee is a minor. For example, if the property is Canada Savings Bonds, the interest income after the transfer will be attributed to the transferor.
(iii) Who Bears the Tax Burden?
As already noted, an unfair tax burden may result upon the death of a joint owner of appreciated property if one beneficiary is a joint owner of property with the individual while a different beneficiary will inherit the individual’s estate pursuant to his or her Will. This is because any income tax liability arising in respect of the deemed realization of the joint property on the individual’s death is borne by the beneficiaries of the residue of the individual’s estate, while the beneficiary who is the surviving joint owner receives the joint property tax free. This will reduce that portion of the individual’s estate available to the beneficiaries under his/her Will.
(iv) Land Transfer Tax
The final tax implication is that if a parent changes real property that is subject to a mortgage to a joint tenancy arrangement with a child, land transfer tax will be exigible.
In summary, there has been a noticeable increase in transfer of title to assets, particularly the family cottage, bank accounts and investment portfolios, into joint tenancy, often being effected by individuals without the assistance of professional advice. Many estate plans are being influenced by the perceived need to reduce or eliminate probate taxes without considering other factors such as what the individual actually wants to do with his or her estate. Complicated transfers of property into joint tenancy may avoid probate taxes at an initial level or result in the convenient administration of one’s estate as one ages. However, the transfers may create unforeseen tax consequences and eliminate or reduce the ability of the individual to later change his or her mind as to the ultimate recipients of his or her property.
Corina S. Weigl