Beware of the Risks of Joint Ownership

A top concern among clients planning their estate is how to reduce taxes, which may be triggered on the death of the client?

Transferring property before death is a common method that is used to avoid or reduce the amount of tax their heirs will have to pay.  With proper advice and tax planning, a person can reduce the amount of tax payable. If done improperly, it could result in a disaster, exposing the heirs or an estate to substantial tax liability, such as in the
following case.

In DePedrina v. The Queen, Bruno and Elaine DePedrina (the “Parents”) owned and resided on a five acre property in Langley, British Columbia.  In an attempt to reduce the taxes that they believed would be payable following the disposition of the property on their death, they signed and registered a deed in 1978 that transferred the property to their children, while reserving a life interest for themselves.

The parents never told their children about the transfer before signing the deed but did say that “their inheritance had been taken care of.”

The last surviving parent died in 1997 terminating the life interest.  In 1998, the children sold the property and as a result of the sale, capital gains tax was triggered and approximately $700,000 was owed to the Canada Revenue Agency.  This would not have occurred had the Parents kept the property in their name and utilized the principle residence exemption.

Unhappy with the taxable event as it undermined the purpose of the transfer in 1978, the children appealed to the court mainly on grounds of fairness arguing that they should not be taxed on the gain that accrued prior to their becoming full owners of the property, which occurred in 1997 following their Mom’s death.  If their argument was successful, the gain accrued in the property from 1997 to the date of sale in1998 would be nominal, thus substantially reducing the capital gains tax payable.

The Crown, on the other hand, argued that the children became owners of the property in 1978 and therefore they are properly taxed on the gain that arose after that time.

In his decision, Woods, J. acknowledged that the circumstances of this case seem to be sympathetic but nevertheless held that the Court had no power to give relief on the basis which the children desired. Woods, J. stated “it is the role of Parliament to enact tax legislation. This Court has jurisdiction to reduce tax assessments but only those that have not properly applied the legislation.  If the assessments properly applied the law, the Court has no ability to provide relief even if the result is harsh… the taxpayers’ understanding of the parents’ intent cannot override the legal effect of the deed that the parents signed.”  Woods, J. further rationalized his holding on the grounds that the Parents had the benefit of Counsel prior to executing the deed that resulted in the legal transfer of the property and if it was their intention to provide an inheritance which is in effect what the deed did.

Joint ownership of assets certainly has its benefits, but it also carries risks.  DePedrina v. The Queen teaches us that if you are considering joint ownership as a tool for estate planning it is important that you seek the advice of a lawyer and an accountant to obtain all of the material information necessary to making an informed decision.

Thank you for reading and until Monday..

Rick Bickhram