Joint accounts: what you need to know!
Establishing a joint account may seem like a great strategy at first glance. However, there are many factors that must be considered before taking this action. This article will explore the use of ‘joint accounts’ and the related estate planning, control and tax issues and consequences related to these types of accounts.
What are Joint Accounts?
There are two types of joint accounts:
- Joint Accounts with Tenancy in Common
With tenancy in common arrangements, each joint owner may or may not own equal parts of the assets. When one joint owner passes away, their share is left to their beneficiaries as designated in their will or the rules pertaining to intestacy.
- Joint Accounts with Right of Survivorship (JTWROS)
The most common type of joint ownership is joint tenants with rights of survivorship where each individual has equal ownership and control of the assets. The joint owners do not have to be related, however, often they are spouses or parents/adult children. Upon the death of one joint owner, the surviving joint owners automatically receive ownership of the deceased’s portion of the assets. It should be noted that this type of ownership is not available in Quebec.
Why Open a Joint Account WROS?
There are several reasons people consider joint accounts. One being the administration of the estate becomes a lot easier because the “right of survivor” clause allows for the assets in the account to pass directly to the surviving joint owner. This results in the assets essentially bypassing the deceased’s estate. For this reason, many people open joint accounts to minimize or avoid having to pay probate fees (probate varies from province to province). Before placing accounts in joint ownership careful consideration must be taken. When joint accounts are set up, any joint owner is able to withdraw funds from the joint account at any time and does not need the permission of the other joint owner to do so.
As well, assets held in a joint account may form part of creditor proceedings if one of the joint account holders becomes insolvent or declares bankruptcy. These issues raise many questions that should be addressed before setting up this type of account. For example, in many cases spouses may be comfortable with this arrangement now, but if they were to experience marital problems a few years down the road, would each spouse still be comfortable with the arrangement? What if son or daughter was to experience marital problems of his or her own?
Another major area of concern revolves around parents naming their children as joint owners believing this is efficient from an estate planning perspective. The parents need to understand that they will give up full control of the account to their children? What if the children were to experience marital problems of their own?
Tax Implications – Deemed disposition and income tax consequences
The tax implications of setting up joint accounts are different if they are set up with adult children or spouses. This is discussed in more detail below.
According to CCRA, under the tax rules, a ‘disposition’ occurs when there has been a change in ‘beneficial’ ownership as opposed to a change in ‘legal’ ownership. While legal ownership implies ownership or title over certain assets, beneficial ownership differs in that it suggests that certain owners will derive some type of benefit (e.g. income) from the assets.
Where legal owners have beneficial ownership, each joint account holder is equally responsible for the tax liability and each owner will report earnings based on their portion of ownership (attribution rules may apply between spouses, as discussed below).
Setting up a Joint Account with a Spouse or Common-law Partner
If a joint account is set up with a spouse, the tax consequences of a deemed disposition are avoided because federal tax laws permit property to be transferred between spouses at the adjusted cost base (instead of FMV). In this situation, tax on the appreciated value of the asset can be deferred until the asset is actually sold. At that time, the gains would be attributed back to the spouse who contributed the assets to the account. Also, assets would pass directly to the surviving spouse, not pass through the estate and not be subject to probate.
Reporting income on joint accounts between spouses seems to cause many misconceptions.
Although an asset may be a joint account for legal purposes, CRA looks to beneficial ownership (not legal ownership) when determining who should pay tax on any income generated in the account. So, although a married couple may have a ‘joint account’, income or growth is to be reported for tax purposes according to the proportion of funds that each spouse contributed to that account.
Setting up Joint Account with an Adult child (over 18)
A transfer of property to someone other than your spouse or common-law partner may trigger immediate capital gains tax. For example, if three adult children became joint owners with a parent, ¾ of the asset would be deemed sold by the parent. If the asset had appreciated in value the parent would owe taxes in the current year. The future capital gains and losses on the asset and any future income on the assets would be reported proportionately for tax purposes by the parent and the three children. Note that in the case of bank accounts, GICs, T-Bills or similar fixed income investments there would be no tax consequences as a result of a ‘deemed disposition.’ Taxes are paid on these assets each year.
The Controversy…CRA vs. provincial legislation
Controversy revolves around whether or not the strategy actually avoids probate fees on assets that have been placed in joint tenancy with someone other than a spouse, when no disposition for tax purposes was claimed at the time of the change. CRA states that if there was no transfer of beneficial ownership and no disposition for tax purposes when the child’s name was added, then on the parent’s death the entire asset was owned by the parent and therefore should be included in probate. In fact, the child is acting as a trustee and not as a joint tenant.
However, the legal community will argue that since the administration of probate is provincially mandated, it has nothing to do with income taxes or CRA. In fact, legislation states that the value of an estate for the calculation of fees ‘does not include…property held in joint tenancy’ since they pass outside of the estate. But this brings back the issue of CRA claiming that a true joint tenancy arrangement does not exist if you merely add a child’s name to the title of the asset, so reducing probate fees is not achieved
While avoiding probate may seem like a great objective, individuals must be aware of the deemed disposition and attribution rules and must completely understand the control implications of establishing joint accounts. For this reason, transferring assets into joint ownership should never be done without professional tax and legal advice.
This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc.(SCI), a member of CIPF. This publication is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case.
Read more Navigating Your Wealth articles
- Joint accounts: what you need to know! Aug 21
- The emperor's new clothes Aug 14
- Geopolitical tensions rattle markets Jul 24
- Euro debt woes re-emerge Jul 17
- Why buy money market funds? Jul 3
- Are we there yet? Jun 26
- ECB rolls out stimulus measures Jun 12
- Estate planning isn't just for the wealthy Jun 5
(Click for RSS instructions.)