The two most common ways people choose to own property together are tenancy-in-common and joint ownership. For estate purposes, the key distinction here is that a tenant-in-common interest falls into a deceased owner’s estate, whereas a joint interest bypasses the estate and instead passes to surviving joint owners.
Thus, joint ownership can assist in avoiding probate tax otherwise applying on estate assets. However, a transfer into joint ownership is prima facie a taxable event. That’s not generally a problem for spouses, but the addition of a non-spouse – including an adult child – could mean tax on capital gains is triggered, not to mention potential exposure to creditor risk and matrimonial claims.
The key issue is if and when beneficial interest in the property passes. Recent cases have explored grey areas, signaling a warning to ill-advised efforts and shedding a light on expanded planning opportunities.
2007 SCC 17 Pecore v. Pecore, 2007 SCC 18 Madsen Estate v. Saylor
These concurrently-heard Supreme Court of Canada (SCC) cases involved claims following the death of an aging father who had added an adult daughter as joint account owner. In each case, the respective father maintained control of the accounts, used the funds for his own sole benefit, and paid all associated taxes.
The SCC held that the law of resulting trust applied where there is a transfer to an adult child with no consideration given in exchange. This means that the transferee child has the burden of proof to prove that it was the parent’s intention at the time of transfer to pass a beneficial interest.
The daughter succeeded in Pecore where it was held that a joint interest was established at the time of opening the account. However, the interest was not outright, but rather it was the transfer of the right of survivorship in what might remain in the account at the father’s death.
In Madsen, the daughter was unsuccessful, and was thus determined to be holding the remaining account value at the father’s death, for the benefit of the estate beneficiaries.
2014 ONCA 101 Sawdon Estate v. Sawdon
After experiencing frustration in dealing with his wife’s bank accounts after her death, Arthur Sawdon transferred all his financial accounts into joint ownership with two of his five adult children. He stated to them his intention that all five should receive equal entitlements.
The passing of the estate trustee’s accounts was challenged by a charity that was the residual beneficiary of Arthur’s estate. The charity sought to have the jointly held assets of about $1 million included in the distribution, presumably on the basis of a resulting trust in favour of the estate.
Rather than being a resulting trust, the appeal court found that there was an express trust at the time of the transfer into joint names. In the judge’s words, “from the time that the Bank Accounts were opened, those holding the legal title to the Bank Accounts held the beneficial right of survivorship in trust for the Children in equal shares.”
- Absent evidence to the contrary, the addition of an adult child as a joint owner immediately transfers property rights. In theory the transferee could immediately access and use the funds for his or her personal benefit.
- Under a resulting trust, the adult child will be entitled to the account proceeds at the parent’s death, to be distributed among the estate beneficiaries.
- An adult child who rebuts the presumption of resulting trust is beneficially entitled to the account proceeds at the parent’s death.
- It may be that a trust is created at the point of transfer for which the beneficiaries are other than the estate, though the point of entitlement is again at the parent’s death.
- Given the multiple potential outcomes, it may be advisable to create a record of the parent’s intentions at the time of transfer. While the financial institution’s forms and the parent’s later actions may have some evidentiary value, a written statement made contemporaneous with the transfer would provide greater certainty.