Should Your Bank, Investment Accounts, and Home Be Jointly Owned With Your Child?

This article was written by A. Thomas Clarke, partner, and Jordan Gin, articled student.

Joint ownership of a bank account, investment account, home or other asset provides a useful tool to achieve unique estate planning outcomes. However, when joint ownership is used without proper advice and understanding, it can frequently give rise to problems. Thoughtful planning with wills and estates law experts can help mitigate these unexpected consequences.

Uses of Joint Ownership and Possible Outcomes

Financial advisors and accountants often recommend that bank accounts, investment accounts, homes and other assets of older adults include the name of their adult child in some form of joint ownership. This is commonly used with the hope of achieving a number of outcomes, the most common include:

  • convenience, to enable the adult child to handle banking and investment matters;
  • to avoid probate or minimize property transfer tax; or
  • to keep assets out of the estate to avoid wills variations claims.

When a parent in joint ownership of an asset passes away, financial institutions and the Land Title Office will generally honour the right of survivorship resulting from the joint ownership. However, this does not necessarily mean that beneficial title to the asset automatically passes to the surviving adult child.

Where an adult child is added as a joint owner of a parent’s bank account, the landmark Supreme Court of Canada decision in 2007, Pecore v. Pecore. identified three potential outcomes:

  1. An immediate gift of half the legal and beneficial interest. Upon the parent passing away, the adult child obtains the entire beneficial interest by right of survivorship.
  2. A bare trust, where the adult child’s name is on the account only as a matter of convenience and the child’s half interest in the asset is held in trust for the parent. Upon the parent passing away, the whole beneficial interest passes to the parent’s estate.
  3. A gift of right of survivorship, where the parent retains the entire beneficial interest while alive, but on passing away the entire beneficial interest immediately passes to the child.

A gift of right of survivorship is a unique outcome that is often desired but not achieved. It can be difficult to prove and requires precise documentation laying out clear intentions. Few financial institutions are aware of this potential outcome and less have proper procedures for ensuring it occurs.

Intention – How to Determine Which of the Three Pecore Outcomes Exist?

Intent is the defining factor in deciding whether a joint ownership arrangement is a true immediate gift, a bare trust or a right of survivorship. Determining intent is straightforward if there is clear documentation, but this is relatively rare.

Absent clear documentation, the court will look to indicators of intent. Some examples include:

  • If the jointly owned asset is a house and only the parents live there, it is likely not an immediate gift;
  • If the jointly owned asset is an investment account and the parent did not pay capital gains tax when the parent added the child as an account holder, it is probably a bare trust;
  • If the parent is paying all of the income tax on income from an investment account or rent from renting a house that is jointly owned, it is probably a bare trust; and
  • If the jointly owned asset is the parent’s principal residence and the parents did not report to the CRA the disposition of half the interest as required, it is either a bare trust or a CRA disclosure problem.

Unintended Consequences

A range of unintended consequences can arise if there is not clear documentation of a parent’s intention from when the joint interest is created – for example:

  • If there is a true gift of half the beneficial interest in a family home, often the parent’s Will does not mesh and take into account the beneficial interest. For example, what if there are three children and the parent wants all three to inherit equal value? Has the Will be structured to reflect that one child receives the entire house outside the Will?  A solution can be for the Will to contain an offset mechanism but often net estate (after taxes) is not large enough to enable an adjustment.
  • A true gift of a home causes the parent to lose the permanent residence exemption to the half interest transferred to their adult child. This can lead to a large and unanticipated capital gains tax bill.
  • Where there is a bare trust and the parent retains the entire beneficial interest in the object, different issues can arise. The executor will need to pay probate filing fees on the entire beneficial interest in the house if probate is required for a single other asset. This is because all assets, including beneficial interests, must be disclosed in the affidavit material filed with the court.
  • A related caution is that probate often turns out to be required when it was initially thought to not be needed. For example, ICBC will require probate for a car that is in a parent’s name if it is above a specified value.
  • Another thing to consider is the speculation and vacancy tax – while the parent is still alive and the house is in both the parent and child’s name, there are some circumstances where the child who is on title may have to pay the speculation and vacancy tax.

One final point that relates to all the possible outcomes discussed in Pecore, is what happens if the child dies before the parent? It is also important to consider what the adult child’s will states in relation to the joint ownership.

Conclusion

Joint ownership invites a wide range of outcomes, some of which are unexpected and may come with a high tax bill. Clear advice and documentation on joint ownership and a well-developed plan can leverage these unexpected consequences to bring about favourable outcomes for both parents and their adult children.

If you have any questions about this article and what it might mean for you, please contact A. Thomas Clarke or anyone else on our Wills & Estates Law Team.

The content of this article is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Users of this article are advised to seek specific legal advice by contacting members of Edwards, Kenny & Bray LLP.

 

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