The Benefits And Dangers Of Joint Accounts

Snowy Park BenchThis articles discusses the general issues around joint accounts (in all provinces except Quebec).

Why Have Joint Ownership?

Many people set-up joint accounts for a variety of reasons. For a married or common law couple, it could be for the day-to-day management of expenses. The account provides all parties equal access to the funds in the account to pay bills and manage the family’s affairs.

The account is also commonly used as a a way to ease the administration of an estate and reduce the probate fee (in Ontario the rate is 1.5% of the estate value).

The thought in most cases is that a parent will add a child to the account or title in the case of a home with the intention that the joint owner will distribute the assets equally to the other siblings or those named in the will. As is often the case, the surviving joint owner keeps the funds. However, the registration of joint ownership can have both negative tax and other consequences.

Tax Consequences of Joint Ownership

The transfer of property (investments, real estate, business asset etc.) to another person is considered a disposition of property at fair market value. In other words, the person transferring the property is considered to have sold the property at it’s fair market value. Any gain in value from it’s original cost will be considered a taxable gain and must be reported as so.

If the person receiving the property is your spouse, the gain is deferred but any income will remain taxable in your hands. This effect is due to the income attribution rules.

Other Non-Tax Consequences

Other non-tax considerations from transferring to joint ownership can have a number of unintended consequences. These can arise from family disputes, sibling rivalries or matters that you may never have considered. These include:

  • Loss of Control: You may lose control over the property and decisions may no longer be made without the consent of the other party.
  • Bankrupt Joint Owner: If one of the account holders becomes bankrupt the joint account will form part of the bankruptcy. You may find that you lose some of your assets to settle the other party’s debts.
  • Sibling Rivalries: If the joint owner is a one child but not the others,  a conflict may arise particularly if the joint owner decides not to share the proceeds.
  • Divorce: If the joint owner goes through a divorce, your property could be subject to the divorce proceedings.
  • Principal Residence: If the joint owner has a home of their own, joint ownership may limit their ability to claim the full principal residence exemption.

Lastly, joint ownership can cause a change in cost base for one owner but not the other and the administrative burden.

The use of joint accounts is not as simple as it may appear particularly when used as part of one’s estate plan. A well constructed estate plan should be carefully documented and your wished are fully communicated to all family members concerned. Your will should be current and up to date and take into consideration recent changes in tax legislation.

Dean C. Paley, Professional Corporation, CPA are Burlington Accountants specializing in estate planning and estate administration. If you would like to discuss your estate plan, the care of survivors and the efficient transfer to your intended beneficiaries, please give us a call today at 289-288-1206 to discuss how we can help you with your estate plan.

Dean Paley

A graduate of Simon Fraser University, Dean started and operated an independent painting company while perusing a degree at SFU. After graduating from Simon Fraser, Dean entered the Certified General Accountants Program of Professional studies where he obtained the professional CGA designation. After a number of successful years as the head of finance for the Canadian operations in a global financial services firm, Dean moved into a marketing role and established and launched a tax, estate and financial planning support department and service to advisors and clients. During this time Dean successfully obtained the Certified Financial Planner (CFP) designation. Dean has been a member of the Canadian Forces Reserve spanning three decades serving in the Royal Westminster Regiment (B.C.), the Military Police and later as a commissioned officer in the Cadet Instructors Cadre in Hamilton Ontario. Dean Paley CGA CFP has been interviewed and quoted in major media such as the National Post, Financial Post, Toronto Star, Canadian Business, Money Sense and Investment Executive. Dean is married to his lovely wife Deborah and has four lovely children.