Douglas Buchmayer, Gowling WLG (Canada) LLP

As many of you will be aware, probate is the process by which the Will of a deceased person is submitted to the Court for verification. A tax under the Estate Administration Tax Act of Ontario (formerly known as “probate fees”) of 1.5% is levied on the value of all assets of the deceased dealt with by that Will. Notionally not included in the calculation are beneficiary-designated registered plans and life insurance policies, as well as assets held jointly with others.

Seizing on this last exclusion, assets held jointly with others, a common and seemingly simple strategy aimed at avoiding probate fees is to transfer assets such as the family home, cottage or investment accounts into the names of adult children as joint owners. Relying on the right of survivorship inherent in this form of ownership, the parent’s ownership automatically disappears on death (assuming the parent dies first) and technically never becomes part of their estate. It sounds simple, but maybe not so much any more as a result of recent changes in the Ontario government’s approach to calculating probate fees as well as new reporting obligations under the federal Income Tax Act.

 Assume for example that a parent transfers their home and other capital assets to themself and their adult child as joint owners. Relying on the assumption that the child will outlive the parent, the assets end up registered solely in the name of the child upon the parent’s death. But will the value of the parent’s formerly owned assets escape the calculation of probate fees if the parent’s Will needs to be probated for any other reason? Not necessarily. The child may be deemed by law to be holding the beneficial ownership of the parent’s assets as a resulting trustee for the parent’s estate.

As affirmed in the 2007 Supreme Court of Canada decision of Pecore v. Pecore, 2007 SCC 17, there is a presumption at law that joint assets that were transferred gratuitously from a parent to their adult child are deemed to be held by the child upon the parent’s death in resulting trust for the deceased parent’s estate. To rebut the presumption, evidence must show that at the time of transfer, the parent intended to gift both legal and beneficial ownership of that asset (by in effect gifting the right of survivorship) to that child and that child alone.

The Ontario government takes the position that assets held in resulting trust for an estate are subject to probate fees. For this reason, the value of such assets, even though they end up in the sole name of the surviving joint owner, may nonetheless need to be included in the probate fees calculation, exposing them to the 1.5% tax. The goal of sheltering the value of the parent’s assets from probate fees may be thwarted in the absence of evidence sufficient to rebut the presumption of resulting trust.

In addition to the probate uncertainty is the effect the simple transfer into joint ownership has under the Income Tax Act. On its face, the transfer to the parent and the child as joint owners is a disposition of 50% of the parent’s ownership in the assets compelling reporting obligations on the parent under the Income Tax Act. If one of the assets is the home and the ability to apply the principal residence exemption is a concern, here is where it can get a bit complicated.

Starting with the 2016 taxation year, the disposition of a principal residence must be reported on Schedule 3 of the disposer’s tax return in order to claim the principal residence exemption, which must also be specifically indicated. If the adult child is not also living in the home, the child’s interest in the home potentially becomes exposed to capital gains tax liability from the date of transfer onward, and the parent’s access to the principal residence exemption on the child’s 50% interest runs the risk of being lost. The potential exposure to capital gains tax liability may well exceed the concerns over probate fees.

To address both the probate uncertainty as well as adverse income tax consequences, the parent and the child need to document that, notwithstanding the formal transfer of legal ownership in the assets into joint ownership, the parent continues to hold 100% beneficial ownership. Such document will rebut the presumption of resulting trust that otherwise gets in the way of probate planning, and the Canada Revenue Agency has long been more concerned about beneficial ownership than how legal ownership is formally held, if properly documented.

This could be accomplished with a Deed of Gift & Declaration of Trust. In such a document, signed at the same time as the formal transfer is made, the parent confirms that they are gifting the right of survivorship only to the child and the child confirms that they are holding all of the parent’s beneficial ownership as a bare trustee (which is not the same as a resulting trustee) until the parent’s death.

As a result, at the time of transfer the parent will not have disposed of any of their beneficial ownership in the assets in question and therefore will not need to report the transfer in their tax return. At the time of the parent’s death, the child will then take full ownership of the parent’s beneficial and legal ownership through the right of survivorship and on the parent’s terminal T1 Tax Return the deemed disposition of the total value of the parent’s ownership of the assets will be reported, and in the case of the home, together with full claim to the principal residence exemption.

Starting in 2025, as a bare trustee the child will be required to file T3 Trust Returns under the new trust reporting requirements of the Income Tax Act every year until the parent’s death or a sale of the assets. Penalties for not filing can be considerable. Proposed Technical Amendments issued August 12, 2024 may exempt these requirements if the asset is a home, the individuals involved are related persons, and the property would be a principal residence of one or more of the legal owners. But the T3 Trust reporting obligations will continue to apply to any other capital assets (such as a cottage or investment account) held by the child as bare trustee.

Jointing ownership of assets with children in an effort to benefit from the right of survivorship to avoid probate fees is no longer all that simple.