Are your clients paying too much tax?

The distinction is important. A joint ownership comes with a right of survivorship of those who live on after the death of one of the joint owners.

It is the most common type of ownership between spouses, but also a way to own property when an adult child is added on to the deed or if siblings own property between them.

“The joint ownership might be okay to make use of, but the danger you run into with such an arrangement is that, as between spouses, the death of one of the owners will make property value go over to the other owner [typically an heir or a sibling],” said Carroll.

If that outcome is undesirable, tenancy in common is the more appropriate way to hold the property.

“The ‘in common’ interest falls into the person’s estate for that person to distribute according to their will,” he said. “During the course of the ownership of property, the default under tenancy in common is that each co-tenant has the ability to deal with their respective interest without necessarily having to get permission of the other co-tenants.”

Under joint ownership, however, the co-owners can’t pass on joint ownership interest to another person outside of the original arrangement without discussing it and gaining permission from the other joint owners.

“You have more capability to be independent with it under a co-tenancy than under a joint ownership arrangement,” said Carroll. “In terms of the transfer of the legal interests, one of the biggest benefits is your ability to deal with those assets.”

Tax implications

How tax is handled has much to do with the relationship between the joint owners. There’s usually little concern if it’s between spouses.

“When one of two spouses dies, we can pass capital properties between spouses at its costs base,” said Carroll. “Whereas if you have anyone other than spouses involved in co-ownership of property, then you don’t have that ability to transfer over at cost base.”

People may be added as owners of property, but that’s subject to taxes due to be paid based on whether it is a deemed disposition of the property or an actual disposition—aka a sale.

Carroll uses the example of parents: “After the first parent dies, the widowed parent continues on in the ownership of the cottage and her home in town. She’s got a single adult child who she’s going to pass this cottage on to.”

When she dies, under most circumstances the property will fall into her estate and, in most provinces, the value of that will be subject to probate. In Ontario, for example, anything in excess of $50,000 is subject to 1.5% probate tax.

“Where she’d owned her house and her cottage previously in joint ownership with her husband, she now decides to add her son on as joint owner,” said Carroll. “The problem with having done that, [if] she’s doing that to avoid probate tax, is that there’s a deemed disposition of one half of the value of the property. And so . . . one half of that is deemed as disposed and you’d calculate out the capital gain and the tax that would apply on that capital gain.”

Alternatively, it is possible to transfer a joint interest that passes immediately prior to the parent’s death. For instance, a father could add on a daughter as a joint owner, and then defer the point at which the benefit passes to her. The date can be as late as the immediate moment prior to his death.

“The upshot of it is, because there’s no beneficial transfer of ownership, you don’t have a deemed disposition on the value of the account, or on the value of the cottage. And, therefore, you defer off the capital gains recognition,” said Carroll.

Interpersonal issues

Any internal disputes at the time of transfer, or when the recording of ownership is being discussed, could mean the whole venture ends up a big mess.

“Notwithstanding we’ve put wonderful pieces of paper down that say ‘This is the way it’s going to operate,’ the fact is that if people don’t get along then all you’re going to be doing is just feeding the lawyers, because you’re just going to be fighting and creating legal fees,” said Carroll.

And, how well the co-owners get along will impact maintenance arrangements for the property.

“Money has to be put into it for general upkeep, to pay the taxes, all the rest of those things,” said Carroll. “Has that been discussed? Is there a reasonable plan in place for doing that, or is [there an understanding that] whenever things come up people just open up their respective wallets and expect that it’ll even up over the course of time?”

The latter can work for some, but for most that’s a recipe for disaster. And you have to agree on use schedules “because everybody wants to have Canada Day weekend or the long weekends. Everybody wants the middle of the summer.”

Rental property

Estate planning becomes a different ball of wax when co-ownership of a rental property is in play.

For starters, Carroll says those arrangements lend themselves to the use of a corporation.

“Taxes overall have to be considered in what you’re doing in any decision of ownership,” he said. “The benefits of having the corporation as owner, where you have the different members of the family who are otherwise going to own a piece of property, is that if the corporation owns the property then you’re distancing yourself personally from the liability of owning and managing the property.”

A corporation as the property’s landlord provides a corporate veil which keeps its shareholders distanced from the property in the event of a lawsuit.

If the planning involves owners of multiple properties, then it’s likely the owners have an active business.

“In this case owners, would get the benefit of having the small business tax rates applying to the ownership, or the income that’s generated, as well as the potential to get the lifetime capital gains exemption on the shares owned,” said Carroll.

This will depend on how the property is managed, how many properties are involved, and how actively they’re managed.

“If you’re talking about a rental property then you are probably more inclined to use a corporate structure in that circumstance than you are to use either co-ownership or joint ownership, or trusts.”

RRSP room

This isn’t a core issue, but be aware that net rental income is included in assessment of RRSP contribution room.

“If you had two [siblings] who come into a property when they’re in their 30s, [and] they’re renting out their parent’s former house, whether under joint or a tenancy in common, then the net rental income will be an amount which is included in calculating RRSP contribution room, just as your employment income contributes to the amount of RRSP room.”

This might influence their decision to hold the property directly rather than holding it through a corporation, which negates the benefit of RRSP contribution room.