For many Canadians, a home is their most valuable financial asset. When it comes to estate planning and property ownership, how you hold title to your home can significantly affect your taxes, your estate, and your heirs.
One of the most common forms of shared ownership is joint tenancy. It is often chosen for its simplicity and the perceived ability to bypass probate. However, beneath the surface, joint tenancy can create complex tax consequences and legal risks if not carefully considered.
What Is Joint Tenancy?
Joint tenancy, also known as joint tenancy with right of survivorship, is a form of ownership where two or more people own an undivided interest in a property. If one owner dies, their interest automatically transfers to the surviving owner or owners, without passing through the deceased’s estate.
This differs from tenants in common, where each owner holds a defined share of the property. In that case, a person’s share becomes part of their estate upon death and is distributed according to their will or under provincial intestacy laws if there is no will.
Joint tenancy is particularly popular among married couples and aging parents who add an adult child to the title. The goal is often to avoid probate fees, simplify asset transfers, or prepare for potential incapacity. However, it is important to understand the tax implications of joint tenancy in Canada before proceeding.
Tax Implications of Transferring Property into Joint Tenancy
While joint tenancy may seem like a convenient solution, transferring ownership, especially between generations, can trigger unexpected tax consequences. Three concepts are particularly important to understand:
- Capital gains tax
- Attribution rules
- Beneficial ownership
Capital Gains on Joint Property
Under the Income Tax Act, a capital gain is generally triggered when a property is sold or when there is a deemed disposition. A deemed disposition can occur upon the owner’s death or when beneficial ownership of the property changes.
For example, if a parent adds a child to the title of a home that is not the child’s principal residence, and beneficial ownership is also transferred, a partial disposition may occur. This can trigger capital gains based on the fair market value of the portion transferred.
If the parent retains full beneficial ownership and the child is added in name only, then the Canada Revenue Agency (CRA) may not consider it a disposition. However, this relies heavily on documented intent.
Attribution Rules
If property is transferred to a spouse or a minor child, attribution rules may apply. Under these rules, any income or capital gains generated from the property may still be taxable in the hands of the original owner, as outlined in section 74.1(1) of the Income Tax Act.
For example, if you add your minor child to a rental property as a joint tenant, rental income and future capital gains may still be attributed back to you, even if the child appears on title.
Joint Tenancy and Estate Planning in Canada
One of the main attractions of joint tenancy is the ability to avoid probate, particularly in provinces like Ontario where probate fees can be substantial. Because jointly held property passes outside of the will, it is not subject to probate on the first owner’s death.
However, courts and the CRA have become more cautious about this strategy, especially in parent-child arrangements. In the Supreme Court of Canada case Pecore v. Pecore, 2007 SCC 17, the court clarified that when an adult child is added to an account or property title without receiving full beneficial ownership, a resulting trust is presumed.
This means the property may still be considered part of the parent’s estate and subject to probate unless there is clear evidence that a gift was intended.
Without proper documentation, families can face costly legal disputes and additional tax liabilities.
Common Joint Tenancy Mistakes in Canada and How to Avoid Them
Failing to Document Intent
Without clear documentation, courts or the CRA may assume the property remains part of the estate. Always consult a lawyer to prepare a deed of gift, letter of intent, or other documentation when adding someone to a title.
Unexpected Tax Burdens
Joint tenancy can shift ownership but does not necessarily shift tax responsibility. It is essential to understand whether you are transferring legal title, beneficial ownership, or both.
Loss of Control Over the Property
Once someone is added as a joint tenant, they generally must consent to any future sales, refinancing, or changes to the property. If relationships change, regaining sole control may require legal action.
Exposure to Creditors
A joint tenant’s financial or legal problems can affect the shared asset. For example, if your adult child, who is now a joint tenant, goes through a divorce or bankruptcy, their interest in your home could be exposed to their creditors.
Final Thoughts
Joint tenancy can be a useful estate planning tool, but it carries important tax and legal risks that should not be overlooked. From potential capital gains on joint property to attribution rules and probate challenges, ownership decisions must be made with careful consideration.
Mistakes in title transfers can trigger unexpected tax bills, disputes among heirs, or even the loss of control over your property.
Before making any changes to your property ownership structure, speak with an experienced real estate lawyer. Get in touch with us at 587-415-5319 or info@one80law.com