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In becoming a joint tenant, what are the costs associated with it? What impact would a death have on this type of arrangement?
My dad owns a house and a condo. The condo is his primary residence and he rents out his home. The home has greater value. He wants to put me on as a joint tenant. What fees will have to be paid when he does that, or are fees paid upon his death?
—Judson
Thank you for your question, Judson. Depending on both of your tax situations, there are a few different types of fees that you both may need to consider. For example, depending on your particular circumstances, you may be looking at possible capital gains taxes, land transfer tax, legal fees, accounting fees, and lastly probate fees upon the death of one of the joint tenants. Let’s look into each one:
Think of capital gains tax as the fee the government gets when we profit from the sale of an investment. An investment can be any asset that was purchased and then later sold. You can have a capital gain (meaning you earned money from the sale). And you can have a capital loss (meaning you lost money from the sale). Half of that “gain” amount is added to your taxable income, and taxed according to the income tax bracket.
In your particular case Judson, you may have this type of tax affect you and your father a few times. Firstly, when your father is in the process of moving the portion of the property that he owns over to you as a joint tenant, he will have to dispose of the share he owns so that it can go to you.
The first step of moving over the property from your father to you will trigger the capital gains tax for him (if the property is not his principal residence.)
To calculate: He would subtract the value of the property being transferred to you, by the cost he originally paid for it, and then multiply that amount by 50%.
The second time that you may encounter the capital gains tax is when you, Judson, sell your portion of the property that is now in your name.
For example let’s say, down the road, you and your father decide to sell this property, then the capital gains will trigger again for your father’s remaining portion of the property. Again you would calculate the capital gain for you, by subtracting the sale price by the amount the property was transferred to you, and then multiply the result by 50%.
Lastly, another time capital gains could arise is if the property is still held at the time of one of the owner’s death. In this case, the property held by the deceased will be transferred into the estate for the market value on the date of death.
Then capital gains is calculated on both the terminal return (the last tax return of the deceased) and the estate tax return once the property is finally sold.
As you can tell, capital gains come into our tax returns multiple times. And because of that, I encourage you to work with an accountant and/or a Certified Financial Planner, when thinking about moving property into joint tenancy. You want to ensure that you are setting up the best tax plan for this type of transaction.
Almost everything we buy has some form of tax applied to them. And buying a property is no different. Land transfer tax is exactly what it sounds like: A tax charged on the land you buy. The purchaser of the property pays the land transfer tax based on the purchase price.
If you are a first-time home buyer, Judson, then you might be eligible for some government rebates. I recommend speaking with your lawyer to determine what you may qualify for. To see what land transfer tax looks like, you can use the MoneySense land-transfer tax calculator.
Lawyers are the only professionals that can transfer a title of property. You will each need your own lawyers so that they can act for you as individuals, ensuring that the transaction is free from conflict and that you have each received your own independent legal advice. Legal fees vary depending on the lawyer and firm you choose to work with.
I covered capital gains above, and where I recommended that you work with an accountant. Hiring one can save you from making errors on our tax returns for complex transactions, such as yours Judson.
Both you and your father will have to file your individual tax returns each year and have the property reported (if it is earning income) for as long as you each own it. The fees for completing the tax returns will vary each year depending on the accountant and the firm you choose to work with.
In Ontario, the formal name is Estate Administration Tax, however most Ontarians know this tax as “probate tax” or “probate fees.” I call it a probate fee, so I will reference it for the remainder of this explanation.
Probate Fees only trigger upon the death of an Ontarian, and these are calculated based on the assets of the deceased on their date of death.
The way to calculate the approximate fees is to list the market value of every item that goes through the estate, subtract the first $50,000 and then multiply 1.5% against that balance.
The Attorney General has a very simple calculator you can use for an idea of the anticipated probate fees.
Something to consider is that you are only looking to calculate the fee on the items going through the estate. You may not have to factor in any items that have named beneficiaries such as life insurance, tax-free savings accounts (TFSAs), or even property held as joint tenants with right of survivorship (not tenants in common).
Judson, if you are unsure of how the property will be transferred to you, I recommend reaching out to your lawyer to confirm how the property will be registered in your name, and if probate fees will be applicable.
Before you worry about fees, though, Judson, you should really think about whether this arrangement is beneficial to you and your father.
In my experience, this type of a property transfer can sometimes have unintended consequences to the estate plan that surprise us. Since what we do today with our assets can affect the future, there are a few things I want to point out for you and your father to consider:
In this case, you are the child of the owner. It could be that the primary goal is to avoid probate fees upon death. But as you read above, this approach may not save you from capital gains taxes or other professional fees.
Coming up with the reason as to why you and your father would like to come up with this approach will help you both in determining whether saving on one type of fee is worth triggering others.
Adding your name to the property could affect the rest of your father’s will, depending on who he gives the remainder of his estate to. Those who inherit everything, after all his bills and taxes are paid, are called residual beneficiaries. If a portion of the property is transferred into your name, and those beneficiaries were expecting to receive the total sale proceeds of the property when it is sold in the estate, this could cause a shock when it comes time to distribute inheritance monies.
By reviewing the will with your father, you can both determine whether or not the transaction is still inline with your father’s wishes for his estate.
Judson, I should share that there are possible risks of being added as a joint tenant.
That portion of the property is now legally registered in your name and could be included in your net worth, in the case that you are facing bankruptcy claims or divorce proceedings.
Having the asset in your name could expose it to these life events and you could end up having to give up some (if not all) of the ownership to your father’s property, which is something I am sure you would not want.
Working with a lawyer when it comes time to transfer the property and discussing what might happen in those types of situations may prompt a different approach for the property.
Another risk to both you and your father is that you will both have to agree when it comes to property decisions. That can get complicated. What if your father wants to sell, but you do not want to? Or vice versa? Another example is when extensive repairs are required. Will you be splitting the cost and agreeing to these repairs? Or, will one person have more control than the other?
Think of being joint tenants as a relationship and the property is now your child; you will both have to agree on how to deal with the property together.
That said, Judson, there are more risks for your father, than to you, with a property transfer. He is giving up the full ownership of the property, and legally transferring you a portion.
Unfortunately, in my line of work, this is when we can tend to see some financial elder abuse, not that you would do that Judson. By having a conversation with your father and fully discussing the impacts to you both, I am confident that you will work out a plan that works best for you and your family.
When having a conversation with your father, I recommend coming together to answer these questions. And write the answers down. When you meet with the lawyer for the actual land transfer of the property, they may ask you some of these questions. It will be helpful to have the answers well thought out, written down and ready to share.
Having the right professionals to guide you through this process will be vital in understanding the best course of action. A thorough lawyer, experienced accountant and Certified Financial Planner would all be part of the team I recommend speaking with before heading down a path that later cannot be corrected.
Good luck Judson, and thanks for writing.
Debbie Stanley is the CEO and Senior Estate Administrator at ETP Canada, a boutique firm located in Guelph, Ont., specializing in estate administration. ETP Canada helps executors navigate their role with services such as executor support, estate accounting and professional Executor services. For more information, please visit etpcanada.ca.
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