Companion Advisor: Taxes
& Estates |
The convenience of holding assets jointly has led to
the increasing use of joint accounts as a means of transferring wealth
between spouses or partners or to successive generations with little or
no financial or administrative consequences. However, advisors should
exercise caution before recommending that their clients put property into
Joint tenants with rights
The most common form of joint ownership is joint tenants
with rights of survivorship or JTWROS. The Canada Customs and Revenue
Agency (or CCRA) assumes jointly held accounts are JTWROS unless proven
otherwise. Joint tenants with rights of survivorship provides two or more
persons with simultaneous rights of ownership of an account. Each joint
owner has an undivided and equal legal interest in the account. In addition,
each joint owner often also has an undivided and equal beneficial interest
in the account. Upon death of one joint owner, the deceased's interest
in the account terminates, leaving the surviving joint owner(s) with full
ownership, despite any attempted disposition in the deceased's will.
Why joint ownership?
There are two common reasons given for registering
an account as joint ownership. The most common reason is the minimization
or avoidance of probate taxes as assets held in joint name transfer outside
of the estate and are therefore not included in the value of the estate
for probate tax purposes. The second reason is ease of administration
of the account. Many investors, particularly elderly parents, are placing
their investment accounts into joint names with their adult children to
facilitate dealing with the account in the future.
Dangers of jointly held
Before placing accounts in joint names, there are some
potential risks that need to be taken into consideration. Firstly, a transfer
to someone other than a spouse or partner may trigger immediate capital
gains tax. Secondly, a transfer of property generally means not only a
loss of control over the property but quite often the inability to make
decisions relating to the property without the consent of the joint owner.
Assets held in a joint account may form part of creditor proceedings if
one of the joint account holders becomes insolvent or declares bankruptcy.
In addition, there is potential for real conflict upon the death of the
parent, where only one child is registered as a joint owner. When the
parent dies, the child becomes the sole owner of the account, which may
lead to a dispute with other siblings or family members who believe that
they should have a claim on the jointly held account. Finally, if the
account was transferred to an adult child, it may also become open to
division upon marriage breakdown of the child and his or her spouse.
If personal residences are involved, the dangers are
even greater because each co-owner of the property may jeopardize his
or her access to the principle residence exemption, as well as his or
her eligibility as a "first time home buyer" for purposes of participation
in the Home Buyers' Plan.
Deemed disposition &
Deemed disposition & capital gains Under the tax rules,
a "disposition" occurs when there has been a change in "beneficial" ownership
as opposed to a change in legal ownership. In determining whether each
joint owner has beneficial ownership, a number of factors should be considered:
|Whether the account was owned by one of the joint owners prior to making it a joint account;
|Evidence of the transferor's intention to gift the account to the transferee (e.g., via the will);
|Whether the income was used jointly rather than for the sole benefit of the transferor;
|If the income generated by the account was reported jointly rather than solely by the transferor; and
|Whether the transferee actually exercised control over the account prior to death of the transferor.
Where the legal owners have beneficial ownership, each
joint account holder is equally responsible for the tax liability. Each
must report earnings based on his or her proportionate ownership, except
where the attribution rules apply. In addition, the CCRA has consistently
taken the view that the transfer of property solely owned by a taxpayer
into a true joint ownership arrangement (one in which beneficial ownership
has changed) would result in a disposition of the proportionate interest
that is being transferred to the transferee(s) other than a spouse or
In many cases, whether or not joint accounts are advisable
for estate planning purposes will depend on the client's desire to focus
on saving probate taxes or deferring income taxes. Some exceptions to
this trade-off exist if the account was registered jointly from the start
so that no capital gains tax is payable upon the transfer or when the
owner faces a capital loss at the time of the transfer to a joint account.
Finally, investors should remember that a transfer into joint names generally
results in a loss of control, which may not be the desired intent.
ADVICE: Investing requires careful planning
to ensure all essential matters are covered. It strategies should be reviewed
periodically and discussed with a qualified adviser or team of advisers to incorporate
any changes in your personal circumstances.
Agents Financial Services Group are not engaged in rendering tax, accounting
or legal professional services or advice. The comments in this article are not
intended, nor should they be relied upon, to replace specific professional advice.
Before acting on material contained herein. Readers should seek advice that
is appropriate to their personal circumstances from a professional advisor.
* * *
We gratefully acknowledge the contribution of this article from AIM Funds Management Inc.
Joint Accounts - FORUM - March 2002
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