Joint tenancy can help avoid probate fees but not necessarily capital gains tax.
Q: I have joint tenancy with my mother on two properties—a condo in Toronto and a cottage in Kawartha Lakes. She passed away in June 2014. I am keeping both properties. My accountant says that he can count the condo as my mom’s primary residence, but I have to pay capital gains tax on the cottage even though we have joint tenancy. I thought that with the right of survivorship, I didn’t need to pay capital gains tax? He says I am wrong. Can you please tell me what you think?
A: The Canadian Inheritance Study by Decima Research estimates that about $1 trillion in inheritances will be received by Canadian Boomers in the next 20 years. So your estate planning conundrum is becoming increasingly common, Kim.
When property is owned by more than one party, it is frequently held in joint tenancy with the right of survivorship. Spouses typically hold property as joint tenants, whereby upon the death of the first, the asset passes directly to the survivor and does not make up part of the estate of the deceased. More and more, I am seeing elderly parents holding property in joint tenancy with their children, which has pros and cons.
One of the pros is that the time and cost to administer an estate may be reduced. In particular, assets held in joint tenancy that pass to a survivor typically avoid probate fees. Probate fees in Canada can be as high as 1.5% of an estate (Ontario) and must be paid on certain assets in order to validate the will and permit the estate trustee to distribute assets to the beneficiaries. Other provinces have lower, flat fees and probate is less of a financial concern.
One of the many cons is that capital gains tax issues may arise.
In some cases, Kim, when someone gifts an asset to another person, there is capital gains tax that arises at the time of transfer. This is because when you transfer an asset to a third party—or any part thereof—even if money hasn’t changed hands, you are generally deemed to have sold it at fair market value.
In your case, it could likely be argued that the gift of half of your mother’s condo and cottage was not an outright gift, but rather, a case of a resulting trust. Assuming your mother was the sole owner at the time of transfer, used the properties herself and paid the ongoing maintenance costs, case law may suggest that the presumption of advancement did not apply and you were technically holding half the properties in trust for your mother. Accordingly, capital gains tax would not apply at the time of transfer. Though the properties may have been legally held jointly by the two of you, the properties were still beneficially your mother’s until her death.
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Every Canadian is entitled to have one principal residence that grows in value tax-free. Your mother had two properties, meaning that one of them was growing in value on a tax-deferred basis. On your mother’s death, she would be deemed to have sold the two properties and one sale would be taxable, regardless of her holding the properties jointly with you. Capital gains tax would be payable at that time.
So I’m sorry to report that your accountant is correct, Kim. There is capital gains tax payable on one of your mother’s properties. You have discretion as to which property you deem to be her principal residence and you may be able to designate one property as her principal residence for some period of time and one property for another period of time. In other words, if she owned her condo for 20 years and her cottage for 10 years, you might deem her condo to be her principal residence for the first 10 and her cottage for the second 10, in particular if the cottage was worth more and/or rose more in value.
In this example, half the condo capital gain would be taxable and the cottage capital gain would be tax-free. In this way, you can at least retroactively minimize the capital gains tax payable.
Another important point is that if your mother didn’t pay capital gains tax when she gifted the properties to you, which I assume she didn’t, the properties may technically be subject to probate and the resulting cost of probate fees. This is because these assets still technically belonged to your mother on her death and likely should have made up part of her estate for probate purposes.
Capital gains tax is a fact of life, Kim. And in this case, a fact of death. Although it’s unfortunate to pay it, it’s better than the alternative—having an investment that has not gone up in value or worse yet, has lost money.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ont. He does not sell any financial products whatsoever.