Adding a child on title? Think twice!

I often receive calls from potential clients who are thinking about adding a child or other loved one as a joint tenant on property or as a joint holder on a bank account.

Their thinking is: if I can save my loved ones some money on probate fees, and free up funds for immediate use after I die, where’s the harm?

Unfortunately, there are many pitfalls and the circumstances in which it may be an advisable course of action are quite limited.

1. What is the intention? Gift or trust?

In the past, adding a child as a joint tenant or joint account holder was somewhat less complicated. The law presumed that the parent intended the property go to the child upon the parent’s death.

Today, however, where a child is named on title, that presumption is reversed. The child must now prove that the parent intended that the property go to the child upon the parent’s death. In the absence of proof, the child is presumed to hold the property in trust for the parent’s estate.

In other words, if a parent wants the property to pass to his or her child, then to prevent disputes with other estate beneficiaries, the parent must declare his or her intent in another document – in a will, or declaration of gift, for example.

This extra step is often not considered. As a result, joint ownership can invite bitter disputes between heirs.

2. A “deemed disposition”

When a parent adds a child to title, CRA takes the position that the parent has disposed of half the property to the child.

This is significant because in many circumstances, capital gains tax will then apply when the property is sold. Capital gains tax is a tax on the increase in value of a capital asset from the time it was acquired to the time it was disposed of.

There are a few exemptions. The sale of a principal residence is one of them. To qualify, an owner has to “ordinarily inhabit” the residence.

Consider what will happen when a parent adds a child as a joint owner, and that child does not ordinarily inhabit the residence. Capital gains tax will apply to that child’s interest in the property – and that interest is deemed to be 50% – for any period that the child did not live at the property.

To illustrate:

Alison added her son Brad to title as joint owner when she became severely ill in 1994. Alison recovered and lived much longer than she anticipated and died in 2016. Brad moved out of Alison’s house and bought his own house in 1996.

Brad decided to sell Alison’s house shortly after her death. In preparing his tax return, he was surprised to learn that capital gains tax applied to Brad’s interest in the house (deemed to be 50%), from the time he moved out in 1996 to the time the house was sold. The property had increased substantially over that time and he had a six figure tax bill as a result.

This result could have been avoided if Alison had kept Brad off title and simply gifted the house to him in her Will. Had she done so, her executor could have claimed the principal residence exemption for the entire value of the property.

3. Claims against the child

Another good reason to think twice about adding a child as joint owner is that the child’s interest in the property could then be subject to creditor’s claims.

This means that:

  • If the child were to go bankrupt, creditors could claim an interest in the property
  • If the child is married, the child’s interest may become family property. As a result, if his or her marriage were to fall apart, the property could be subject to a claim for division of family property in the event of marital breakdown. In other words, you might have to sell the property to pay out your child’s ex-spouse.
  • If the child is sued, a judgment could be registered against the property.

4. Losing control over the asset

At some point, a parent may decide to sell a property and move elsewhere. Where a child has been added to title, the parent will lose control over when to sell or refinance. The child would need to agree.

While adding a joint owner can seem like an attractively simple way to save on probate fees and reduce the complexity of estate administration, it can often give rise to much larger problems.  You should always obtain legal advice if you are thinking of adding a child or other loved one as a joint owner.