It is very common for people to believe that they are making the best decision by adding their children as joint owners onto their real estate to potentially save some money and help streamline their estate. The two most common types of real estate are principal residences and rental properties. It may make sense for your situation to add someone on to a property’s title but it also opens you up to the potential for enormous liability if you are not informed before making this decision.

Principal Residence

As Canadians, we are very lucky to have a principal residence capital gains tax exemption. This means that your principal residence will be sheltered from any capital gains, which is the difference between what your house sells for and the adjusted cost base (the original purchase price plus any improvements, renovations, etc.). CRA only allows one principal residence per couple (married & common law). If the property is already joint with your living spouse and one spouse passes away then the property becomes solely owned by the surviving spouse without any tax or probate. If the home is still owned by the last surviving spouse upon their passing then the last surviving spouse’s executor will take over with handling the sale and will disperse the proceeds according to the last surviving spouse’s will. The property will remain exempt from any capital gains tax from the value on the day that the home was purchased up until the day of the last surviving spouse’s passing. The estate will incur capital gains tax on any gain that is realized on the difference in value from the day of the last surviving spouse’s passing up until the day that the property is sold. If the executor is handling the sale then that means that the property has passed according to a will, which means that it is subject to a probate fee. In British Columbia, the probate fee can be estimated to be around 1.4%. This means that an estimated sale price of $1,000,000 would be subject to a probate fee of around $14,000.

Rental Properties

Unfortunately, rental properties in Canada do not have any capital gains tax exemptions. This means that, unlike a Principle Residence, a rental property will be subject to income tax if it is sold for a higher value than what it originally cost plus any improvements, renovations, etc.. If the property is sold prior to the last joint owner’s passing then only income tax will need to be paid. If the property is sold by the executor of the last joint owner then it will be subject to income tax and probate.

Adding Children onto Properties

From the information about the different types of properties listed above, people may want to add their children on to the title of their homes to avoid probate in the case of a principal residence or probate and income tax in the case of a rental property. It seems like a great idea to add whomever on the title of a property and continue to defer any probate or income tax for future generations but if it seems like such a great idea then you should also realize that CRA would not allow it. CRA will always want their “pound of flesh” and there is no such thing as a free-ride in the eyes of the tax man. If you make any changes to whomever is listed on title then CRA may look at this like a deemed disposition, which means that any applicable capital gains may be subject to income tax. This would be unfortunate because the property was not actually sold so, unless you have the excess cash around to pay applicable tax from capital gains, then you will be left with a tax bill with no money to pay it.

Another issue that can arise is if the property is your principal residence because CRA only allows one principal residence per couple. This means that if you add someone on title and they already have a principal residence then you may put a portion of your principal residence income tax exemption in jeopardy for future years.

Lastly, and I believe this to be the largest issue, is that any jointly owned real estate may be looked at as each joint owner’s property. This means that if an account is joint then it may be at risk in divorce proceedings, bankruptcy court, and court injunctions. It would be rather unfortunate if you worked your entire life for your home to be paid off only to have to re-mortgage because your child went through a divorce, claimed bankruptcy, or was sued and lost.

All-in-all, without understanding your complete financial situation it is very hard to say whether it makes sense to add anybody onto the title of a property to try to avoid probate or income tax and no one should provide this advice to you without a complete understanding of your situation. This article is only meant to provide information so that all of the repercussions of any actions taken can be thought out beforehand. Do your research, ask the experts, and make sure that you have a complete understanding. Usually, there are a lot of inefficiencies in estate plans that are easier to minimize than something as big and risky as the one discussed above.

Want some help developing your Estate plan? Reach out to me at info@financerx.ca.