As we age, many adults choose to simplify their assets by holding property jointly with one or more of their adult children with the right of survivorship passing to the adult child or children upon death. However, you must decide if your intention is to provide that asset solely to the child or children who are listed as joint owners, or whether your intention is to divide the value of that asset amongst all your beneficiaries.
Joint ownership is frequently used in estate planning. Naming a beneficiary on a life insurance policy or on a RRSP is very common, and often advised. However, joint ownership might not be useful in all circumstances. Property that is jointly owned will not form part of your estate upon death. Similarly, where a beneficiary is named on a life insurance policy or on a registered plan, the proceeds will go directly to the beneficiary.
What is joint ownership?
Joint ownership refers to the ownership of property that is owned by more than one person where there is a right of survivorship. Each owner has an undivided interest in the property. The right of survivorship means that if one of the joint owners should die, the other joint owner automatically becomes the owner of the property. This can apply to different kinds of property, including real estate and investment accounts.
Joint ownership of property is frequently used in estate planning. The reason for this is because property that is held jointly does not form party of the estate of the joint owner that has died. Therefore, probate fees are not payable on that property.
Joint ownership is different from two people owning property as tenants in common. Under tenants in common, although each owner has an undivided interest in the property, there is no right of survivorship. If one of the owners dies, his or her interest in the property would form part of his or her estate. The property does not automatically pass to the surviving owner.
A beneficiary can be named on an insurance policy or can be named within a registered plan such as a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF). Designating a beneficiary creates a similar result as joint ownership. The assets with the beneficiary designation pass to the person named as the beneficiary without forming part of the estate of the owner.
What are probate fees?
There has been a growing perception that the taxes that constitute "probate fees" are very costly and should be avoided. Therefore, joint ownership is being used more frequently to avoid the payment of probate fees.
However, before you simply transfer your assets into joint ownership, you have to decide what you want to do with the assets, how much tax you are saving and if it is ultimately worth it.
There are two things in life that are certain – death and taxes. Even upon your death, you, or more importantly your Estate, must pay taxes on the value of your estate at the date of death.
In Ontario, where a prospective estate trustee applies for a certificate of appointment pursuant to s. 2(1) of the Estate Administration Tax Act, he or she is required to pay the estate administration tax. The estate administration tax used to be known as "probate fees". If the value of the estate is less than $1,000, then no tax is payable.
The amount of tax that is payable is based on the value of the estate. Estate tax is calculated at a rate of $5 for each $1,000 of the first $50,000 of the estate, and $15 for each $1,000 for the amount over and above $50,000. For example, if the value of your estate is $200,000, then your estate will pay $2,500 in estate administration taxes.
Before you can consider how much tax is owed, you have to know what assets are included in the calculation of the value of the estate for probate purposes. Specifically, assets to be included are the deceased's real estate in Ontario (net of debts), and the deceased's personal property such as cash, investments and personal effects. There is some property that is not included in the calculation of estate taxes. Assets that are not included in the calculation of estate taxes include real property outside Ontario; assets that flow outside of the estate such as joint assets; insurance policies with a designated beneficiary; and RRSPs or RRIFs with a designated beneficiary.
Pitfalls to be avoided with joint ownership of bank accounts
The Supreme Court of Canada decision in Pecore v. Pecore1 and Madsen Estate v. Saylor2 stand as the reminder that parents should not add a child's name onto bank accounts or other property without proper legal advice.
In Pecore, the Supreme Court does acknowledge that it is common nowadays for ageing parents to transfer their assets into joint accounts with their adult children in order to have that child assist them in managing their financial affairs. However, whenever property owned by the parent is transferred into joint names with one of his or her children, it raises questions about whether the parent intended to have the property go to the child (who owns the property jointly) alone, or intended to have the property distributed according to his or her Will. This uncertainty can result in expensive, hurtful and emotional litigation between the children.
The Supreme Court made a definitive statement as to how the courts must deal with such cases. It is now law in Canada that whenever a parent gratuitously transfers property into joint names with an adult child, the Court will presume that the property that was transferred was not intended to pass to such child on the death of the parent, but was intended to form part of the deceased parent's estate to be distributed in accordance with his or her Will. If the child/joint owner asserts that the jointly held property was intended to pass to them alone on the death of the parent, the onus is on the child to prove that this was the parent's intention on a balance of probabilities.
Although the Supreme Court has decided that assets held jointly are presumed to be distributed as part of one's estate, the value of such assets will continue to be excluded from the calculation of estate administration tax. Or at least until the Ontario government enacts legislation to include such assets. We will have to wait and see that the Ontario government will do.
There can be unintended consequences when property is held jointly without the benefit of proper legal advice. In estate planning, asset ownership and beneficiary designation for those assets must be reviewed regularly.
The best course of action is to consult an estate lawyer to make informed decisions about your assets.
1 1 S.C.R. 795
2 1 S.C.R. 838