Joint Tenancy or Joint Ownership with Rights of Survivorship

Where the specific asset under consideration is real property the proper term is “joint tenancy”. With respect to other assets, such as bank accounts, the most common reference is “joint with rights of survivorship” often abbreviated as “JTWROS”. The two concepts share elements in common but may also be somewhat different legally as a result of how the rights with respect to property ownership arise in each case. That discussion is outside the scope of these materials but should be kept in mind to avoid assumptions that the two forms of joint ownership will function legally in exactly the same way.

One common element with these forms of joint ownership is that the joint owners all have exactly the same interest in the property meaning the same legal interest in terms of ownership rights (not necessarily percentage share although that again is another discussion outside the scope of these materials). Another is that each owner has the right to the use and enjoyment of the whole of the property, undivided. Finally, in each case, when one owner dies his/her right to the use and enjoyment of the property ends with the result that there is nothing falling into the estate that can be distributed by Will or otherwise. It is incorrect to state that property owned in joint tenancy or JTWROS passes by rights of survivorship because there is nothing to transfer on death. Death ends participation in the joint ownership. That is why it is correct to say property held in joint tenancy or JTWROS is outside of a person’s estate and outside their Will.

Clearly if property held jointly in either of these methods does not form part of a person’s estate it cannot attract estate administration tax at least not the way these taxes are currently structured. Therefore, a popular option for some people wishing to do probate planning is to hold property in joint tenancy or JTWROS. Unfortunately, this planning technique poses a range of potential problems. Some problems are the same ones discussed above such as loss of control and exposure to creditors.

Potential exposure to immediate income tax liabilty deserves additional comment. For the most part, anytime a person transfers property there is a disposition for income tax purposes. The Income Tax Act even has provisions setting out when a person is deemed to have disposed of their property such as death. In the case of changing ownership of existing property to add a joint owner or several joint owners there is a deemed disposition of the portion of the property that will now be owned by others. The transferor will be deemed to have received proceeds of disposition equal to the fair market value of the property. Assuming no eligible adjustments to the cost base, there will be a gain equal to the fair market value less the cost base or purchase price. The new owners will be deemed to have acquired their interest in the property at a cost base that may equal the appropriate percentage of the original price if they do not deal at arm’s length with the transferor and the transfer took place for nominal consideration as opposed to being a true gift for no consideration. This will result in double taxation. If the transferees are arm’s length parties, or there was a true gift, then they will acquire their interest in the property at a bumped up cost base that reflects the fair market value the transferor was deemed to have received. However, in these types of transfers for probate planning purposes the parties rarely are dealing at arm’s length so doing a true gift is the only other option to avoid double taxation.

If the property being transferred into joint ownership was the transferor’s principal residence but it will not qualifty as one for the other owners, the benefit of the preferential tax treatment for principal residences will be lost going forward for the portion of the property owned by the new owners. It does not take much of a gain in value for the probate fee savings to be outstripped by the increaed tax liablity that will be faced when the new owners ultimately sell. This problem can be compounded if the transfer was not done properly as a true gift. It is mistakenly believed that real estate transfers must be done for some form of nominal consideration such as $2 to be valid. This is not correct and will result in double taxation. There must be absolutely no consideration for there to be a true gift and avoid the punitive provisions under the Income Tax Act.

An intriguing problem that has arisen around the use of joint ownership for probate planning purposes is determining what was intended where the transfer is between a parent and an adult child or children. If the transfer is done as discussed above, there are immediate tax consequences. Therefore, it was argued in a recent Supreme Court of Canada case that the parent was gifting the rights of survivorship to the adult child so that the gift only took place at death rather that immediately. There are serious flaws in this argument which are outside the scope of these materials. Readers are cautioned about trying to rely on the case for their own purposes. What the case also attempted to address is whether these types of facts should give rise to a presumption of gift or a presumption of resulting trust to address questions about whether the asset in question was truly intended to be outside of the transferor’s estate or not.

A presumption of advancement would mean the facts favour a gift unless it could be proved otherwise. A presumption of resulting trust would mean the facts favour the property forming part of the estate unless it could be proved otherwise. The Court chose the latter route and said these types of facts create a presumption of resulting trust. This means where an adult transfers property gratuitously (for no consideration) to an adult child or children, it is assumed that the child or children hold the property on trust for the estate unless they can prove that a gift was intended. The consequence of this is that property held jointly under these circumstances will be subject to estate administration tax or probate fees where the transfer was found to be for “administrative convenience” rather than the true intention to make a gift.

Some have taken the position that the surviving joint owners holding the asset on resulting trust for the estate does not attract probate fees or estate administration tax. Unfortunately, this position is not legally correct. The full explanation is detailed and not appropriate for these materials.

A couple of things to note about this case. One is that the decision is worded broadly enough to apply to any gratuitous transfers by a parent to adult children and not just transfers of investment accounts into joint names. It could apply to transfers of real property and it could apply to beneficiary designations.

The other point to note is how third parties are dealing with the situation. Some take the position that the presumption only arises if a challenge arises with respect to ownership of the property and that as long as no one says anything to the third party they can assume it goes outright to whomever is named on the account at the time of death rather than the estate trustee. This does not follow the Court decision which says the opposite. It is the facts of the transfer that give rise to the presumption of resulting trust and not a later challenge. Disputes do not give rise to legal presumptions. It’s just what makes presumptions matter.

The moral of this situation is to be very careful and clearly document what was intended otherwise there may be serious unintended consequences but keep in mind that you cannot and should not say one thing with the expectation that another result will be achieved “nudge nudge wink wink”. It is unlikely to be enforceable.