Today’s blog post has been written by Karen La Caprara, Counsel, at Fasken LLP.

When two abutting parcels of land or properties are owned by the same owner or owners, title to the properties automatically merges, unless an exception to this general principle applies.[i] Once title to the abutting properties has merged the parcels cannot be dealt with independently (i.e. sold or gifted to different people), without applying to the relevant municipality for a consent recognizing the two properties as separate – a time consuming and costly application process, without a guarantee of success.

Prior to January 1, 2022, not only did this parcel merger occur when an owner(s) purchased a property that abutted property they already owned in the same name(s), but it also occurred on the death of a joint tenant where the jointly held property passes automatically by right of survivorship to the surviving owner, who is also the owner of an abutting piece of land. Thankfully, pursuant to amendments to Section 50 of the Planning Act, R.S.O. 1990, c. P.13 (the “Planning Act”) that came into force January 1, 2022, abutting properties in these circumstances no longer merge on the death of a joint tenant. An owner may now deal with a parcel of land that was previously owned by, or abutted land previously owned by, joint tenants that would have merged because of the death of one of the joint tenants.

I will illustrate this change with an example: A couple with two young adult children own a cottage as joint tenants with a right of survivorship. The vacant lot next to their cottage goes up for sale and they decide to purchase it in anticipation of eventually selling or gifting it to one or both of their children for them to build their own cottage. Prior to January 1, 2022, they would have to use complicated or otherwise undesirable workarounds in order to ensure that merger was avoided on the purchase of the vacant lot and also on the death of one of the spouses (for example, purchasing the vacant lot with adult children or other family members on title, purchasing the vacant lot through a corporation as bare trustee[ii], using a trust to hold the property, etc., all of which can create a whole host of issues that have been previously discussed on All About Estates).

Now, with the amendments to the Planning Act, the couple may be able to purchase the vacant lot in one of their names only (Spouse 1) to avoid merger both on the purchase of the property and, also, on the death of a spouse. With the Planning Act amendment, if Spouse 2 dies first such that Spouse 1 becomes the sole owner of the cottage property by right of survivorship and Spouse 1 remains the owner of the vacant lot (“Scenario 1”), the cottage property and the vacant lot will no longer merge. Accordingly, Spouse 1 will be able to sell or gift the cottage property and the vacant lot separately to each of their children, or gift one of the properties to their children and sell the other, etc.

While this amendment to the Planning Act was a welcome change to the merger rules on the death of a joint tenant, it does not avoid the risk of property merger in the context of estate planning all together. Estate planners must still keep the risk of parcel merger in mind when providing estate planning advice. The amendment, for example, does nothing to avoid the merger of abutting properties that are owned by the same individuals as joint tenants with a right of survivorship (though this would be the most straightforward and desirable ownership structure from an estate planning perspective for many families). As well, returning to the above example, does the Planning Act amendment avoid merger if Spouse 1 dies first such that Spouse 2 becomes the sole owner of the cottage property by way of right of survivorship, the vacant lot forms part of Spouse 1’s estate and pursuant to Spouse 1’s Will it is transferred to Spouse 2 outright, either as a specific gift or as part of the residue (“Scenario 2”)? The protection from merger in Scenario 1 is quite clear. It is less clear though in Scenario 2 where Spouse 2 does not become the owner of both properties as a direct result of the death of the joint tenant. Rather, it is the right of survivorship immediately on the death, followed by the provisions of Spouse 1’s Will that result in Spouse 2 becoming the owner of the abutting parcels. It may be that the intent of the amendment would be to avoid merger in both scenarios, such that the outcome would not vary depending on the order of death of the joint owners. Alternatively though, it may be that the legislation was not intended to cover Scenario 2, given that Spouse 1 has the ability to avoid merger of the parcels by including provisions in their Will to ensure that Spouse 2 does not become the sole owner of the vacant lot (whereas apart from severing the joint tenancy, the right of survivorship is unavoidable).

Until confirmation of the outcome of Scenario 2 is clear, it may be beneficial to include language in the Will of Spouse 1 to ensure that the property can be transferred other than outright to Spouse 2. A recent estate planning file that I worked on comes to mind. The clients are a married couple. Their home is owned by Spouse 1 alone (as a form of potential creditor protection given the nature of Spouse 2’s work). They also own an undeveloped vacant lot adjacent to their home that they purchased some time after they purchased their home. They purchased the vacant lot in Spouse 2’s name to avoid merger of the properties (given that the value of the vacant lot is relatively small and that it is a vacant lot rather than their home, they didn’t have the same concern respecting creditor protection). Their existing Wills did not contain any specific gifts of the properties. As such, the properties if retained would form part of the residue of their respective estates, which residue on the first to die was to go to the surviving spouse outright. This transfer of the property held by the deceased to their surviving spouse would result in merger of the two properties. In order to deal with the properties in a manner that was consistent with our clients’ goals and to avoid the merger of the properties on the death of either spouse, the following changes to the planning were made:

1. 1. The vacant lot was transferred into their joint names. If Spouse 2 dies first, Spouse 1 will continue to own the home and will now also own the vacant lot by way of right of survivorship. However, pursuant to the Planning Act amendments, the properties will not merge.
   2. Spouse 1’s Will was revised to provide that the home be held in a spousal trust for the benefit of Spouse 2. If Spouse 1 dies first, Spouse 2 will continue to own the vacant lot but the home will be held in a Qualifying Spousal Trust[iii] for Spouse’s 2 benefit. While at first glance the beneficial interest in the properties may appear to be the same such that the properties would merge, this is not in fact the case. There are additional beneficiaries of the Spousal Trust who have an interest in the property (being the beneficiaries who receive the home on the death of Spouse 2) and accordingly the beneficial interest in the two properties is not the same and the properties will not merge. The spousal trust may not have been necessary here, as perhaps the Planning Act amendment would extend to avoid merger in this instance. Given the potential uncertainty in that regard though, the spousal trust was desirable to provide certainty on the merger issue and also to maintain the potential creditor protection.

Thanks for reading. Wishing everyone a happy and healthy holiday season!

[i] For example, a property that is a whole of a lot on a plan of subdivision is an exception to the general principle.

[ii] Parcel merger occurs when the beneficial interest in the two abutting properties is the same. We have seen nominee planning, whereby a corporation (or individual) holds legal title on bare trust for a beneficial owner, in an attempt to avoid merger. If the underlying beneficial interest in the two abutting parcels is the same though, the parcels will technically merge, notwithstanding that legal title may be in the names of different nominee corporations.

[iii] A Qualifying Spousal Trust under s.70(6) of the Income Tax Act is necessary to ensure that the home will continue to qualify for the principal residence exemption (Income Tax Act, s.54).