Unintentionally extinguishing survivorship with joint accounts

At issue

Over the last few decades, joint ownership has grown in use as an estate planning and property succession tool involving adult children.  The reason for distinguishing here between planning and succession is that joint ownership is a multi-faceted concept.  Below the surface of the recorded title there can be much more going on, with beneficial rights frequently diverging from legal title.   In particular, within families the law presumes that the addition of an adult child to title is not a beneficial transfer, though the child has the opportunity to rebut that. 

One issue that may not be so well known is that joint ownership may operate differently with real estate as compared to bank or investment accounts.  In the former case the real estate itself is the subject matter of the arrangement, whereas in the latter the practical focus (and value) is with the contents of the account.

While this may sound like splitting hairs, it can have some real world implications.  If an otherwise beneficially entitled adult child is not careful in managing those joint arrangements, beneficial entitlement can be put at risk, possibly extinguishing survivorship rights.

Zeligs v. Janes, 2015 BCSC 7, supplemental reasons 2015 BCSC 525, upheld 2016 BCCA 280

Dorothy Burnett was 94 when her daughter Diana Janes (and husband) moved in with her.  Within a year, Diana had been added as joint owner on the property, granted power of attorney by Dorothy, and made joint owner of Dorothy’s bank account.

In the following years, Diana borrowed against the property (for herself, not her mother) via line of credit and reverse mortgages.  After Dorothy entered a nursing home at age 101, Diana sold the house for $2.7 million, retired the accumulated $832,643 in mortgage debt, and used the net proceeds to purchase a new home and investments for herself and her husband.  On Dorothy’s death at age 103, as executor Diana paid the estate expenses and legacies to grandchildren, then split the residue between herself and her sister Barbara Zeligs, each receiving $63,783. 

Barbara died a year after her mother, and her husband later commenced an action as executor of Barbara’s estate impugning many of Diana’s dealings with Dorothy’s affairs.

The trial judge found that though a resulting trust applied on the joint ownership of the home, Diana had rebutted that presumption as well as a claim of undue influence.  The key evidence was a handwritten note the judge found expressed Dorothy’s true intention to add Diana as “joint owner as long as I live and full owner when I die.”  He went on to discuss how joint ownership requires that there be four unities: title arising from same instrument, equality of interest, time of vesting, and right to possession.  It was held that these unities remained intact despite the mortgages taken out by Diana, and even upon sale of the property since the proceeds were placed into the joint bank account.  

However, “once they were withdrawn from the joint account for the sole benefit of [Diana and her husband], to the exclusion of Dorothy, the unity of possession was destroyed and the joint tenancy was severed.”  

The court ordered half of the sale proceeds be paid to the credit of the estate.  Furthermore, in supplemental reasons Diana was held to be in a conflict of interest when she used her authority under power of attorney to discharge the mortgages.  She breached her fiduciary duty to Dorothy and was ordered to return $832,643 to the estate.

In the result, Diana’s actions destroyed her own right of survivorship that would have applied if the home had been held to Dorothy’s death, or even if the proceeds had remained in the joint account after Dorothy’s death.  

Practice points

  1. Joint ownership with an adult child can be more complicated than first apparent, with its application to bank and investment accounts being distinctive and potentially more complicated than in dealing with real estate.  
  2. Even if there is identity of legal and beneficial interests, the continuing form and process of dealings with the property must be carefully managed.  Specifically, if property is encumbered, disposed or converted in a way that is inconsistent with the unity of interests among the owners, current and future rights may be lost.  
  3. Extra special care must be taken where the child/joint tenant also holds power of attorney over the parent’s property, especially after the parent has lost mental capacity.

A sea change for the CPP

More benefits and premiums on the horizon

It may seem to some people that the Canada Pension Plan (CPP) is constantly changing, as it has regularly been in the headlines since the 2008–09 economic downturn. The truth is the CPP goes through incremental indexing every year, while wholesale revisions are uncommon.

But with the recent change in political leadership in a number of provinces and at the federal level, the most significant changes to the CPP since the 1990s have gone from talk to action.

On June 20, 2016, Ottawa and the provinces reached agreement in principle to enhance the CPP. First reading of Bill C-26, which contains the proposed CPP enhancements, was on October 26. At the time of writing, the bill continues to work its way through Parliament, having passed second reading on November 17 and been reported back without amendment from the Finance Committee on November 24.

Here’s what to expect as we transition into this new normal. 

Why increase the CPP?

Research commissioned and analyzed by the Federal Department of Finance points to a concern about both current and projected future under-saving for retirement.

Based on Statistics Canada’s Survey of Financial Security 2012, it is estimated that 24% of families nearing retirement age are at risk of not having adequate income in retirement to maintain their standards of living.

At the other end of the age spectrum, young workers face longer life expectancy, which in turn requires more conscientious long-term savings. With workplace pensions becoming rarer and those already established shifting away from defined benefits, the pressure on individual savings is accentuated. Add to that the current (and potentially prolonged) low-interest-rate environment, and a perfect storm may lie ahead for many working Canadians seeking the safe harbour of a comfortable retirement. 

The components of change

The CPP is structured as an insurance arrangement where premiums during working years fund pensions in retirement.

The retirement pension is calculated as a replacement percentage of a target income level. Accordingly, there are two large levers that can be used to increase pensions: adjust the replacement percentage or the target income level. These changes will effectively do both:

  • The income replacement level will increase from 1/4 to 1/3 of eligible earnings
  • The upper earnings limit will be increased by 14%

Of course, hikes to employer and employee premiums will be required to pay for those increases.

Timelines, and projecting the dollars and sense of it

The plan is to have all changes in place by 2025, with the seven-year transition to begin in 2019. It will occur in two phases.

For the five-year period from 2019 to 2023, the rate of contributions based on the existing year’s maximum pensionable earnings (YMPE) will be raised each year. Currently, employers and employees each contribute 4.95% of the YMPE. By 2023, that will be 5.95% each, based on the following implementation schedule:

Table: Upcoming CPP premium increases

Year / Cumulative addition

  • 2019  0.15%
  • 2020  0.30%
  • 2021  0.50%
  • 2022  0.75%
  • 2023  1.00%

The second phase of the transition will be the augmentation to the earnings limit. The YMPE will continue as a concept, and a new concept will be introduced to track the upper earnings limit: the year’s additional maximum pensionable earnings (YAMPE). The YAMPE will begin as 107% of the YMPE in 2024 and move to 114% of it in 2025, after which the two thresholds will be separately indexed, though using the same standard indexation factor.

The Office of the Chief Actuary projects the YMPE (currently $55,300 for 2017) will rise to $72,500 by 2025, putting the YAMPE at $82,700 (in round terms). On the enhanced portion between the YMPE and YAMPE, the premiums are expected to be 4% each for employers and employees.

Some offsetting relief

To recognize the difficulty low-income individuals may have in budgeting for higher premiums, the working income tax benefit (WITB) is being raised. The WITB is a refundable tax credit that is reduced to zero at an income of $18,292 for unattached individuals and $28,209 for couples with children, in current-dollar values. The value of the WITB will be increased to roughly offset the incremental CPP premiums.

At the upper income end, those employees required to pay premiums on the enhanced portion of the CPP (the range between the YMPE and YAMPE) will be entitled to claim a tax deduction for this amount. The prevailing tax-credit structure will continue to apply to existing employee premiums based on the YMPE. As the tax credit is at the lowest-bracket rate, a tax deduction is more valuable as an employee’s income increases. This has the added effect that, should an employee reduce registered retirement savings plan or pension contributions (both being deductible amounts) in response to the increased premium on the CPP enhancements, there would be no increase in that person’s current taxes.

Selling an advisor’s book [7/8] – Selling when incorporated vs. unincorporated?

[Eight-part series, current to publication date only]
1 – Why and how do we prepare
2 – Finding the right buyer
3 – Getting the best price
4 – Tax issues overview
5 – Incorporation issues overview
6 – Caveats and limitations
7 – Selling when incorporated vs. unincorporated?
8 – Ways to get paid

7 – Selling when incorporated vs. unincorporated?

What happens when you sell an incorporated book versus an unincorporated book?

Asset vs. share debate

Where there is no corporation, the thing being sold is the goodwill associated with the client list (an asset). You’ll want to consider:

Seller’s preference. Where the business is run through a corporation, the seller usually prefers to sell the shares. Doing so gives rise to a capital gain and the potential to protect some or all of that gain with the lifetime capital gains exemption (LCGE), as well as the sharing of the gain and LCGE with other shareholders.

Buyer’s preference. A buyer typically prefers to buy the client list, rather than acquiring the corporation itself. While either route would be a capital transaction (leading to either a capital gain or eligible capital property, ECP), acquiring the shares would bring with it exposure to any corporate liabilities. For MFDA commissions redirected to a corporation, it’s unclear what rights the corporation may actually have to sell.

In a share sale, the seller may realize a capital gain on the amount paid above the shares’ ACB. Only half of capital gains are taxable. Where payments are made over time, a capital gains reserve may be allowed for up to five years, with at least 20% of the gain having to be taken into income each year.

If the shares qualify for the LCGE, up to $824,176 of gains (for 2016, indexed annually) may be protected from taxation. To qualify, the corporation must be a CCPC and must meet two capital tests:

  1. In the two years prior to the disposition, at least 50% of the assets must be earning active business income (ABI).
  2. On the date of disposition, at least 90% of the assets must be earning ABI (based on CRA practice).

On the buyer side, the purchase price will form the ACB of the acquired shares. This is the base upon which the buyer will calculate the capital gain (and possibly LCGE) when she later disposes of the shares.

Sale of goodwill/client list

New regime

The sale of goodwill related to a client list falls under the category of ECP. The amount paid is called the eligible capital expenditure, 75% of which is credited to an account called the cumulative eligible capital (CEC) pool.  [New regime: The 2016 Federal Budget will replace the eligible capital property (ECP) tax regime with a capital cost allowance class. There is a transitional period, so we’ll still discuss the legacy ECP regime, but be aware that new rules are coming in 2017.]

For a buyer, annual amortization of 7% may be claimed based on the balance in the CEC pool, which then reduces the pool accordingly. As compared to buying shares, the buyer will wish to consider whether this regular annual deduction is more or less preferred to capital gains treatment (and potential LCGE) on a future share sale.

Where a seller is selling all goodwill and has not previously claimed any ECP-related deductions, 75% of the amount received for the ECP is deducted from the CEC pool. This creates a negative balance in the CEC pool, two thirds of which is taken into the seller’s income. Where the seller has claimed past amortization out of the CEC pool, the tax calculation on disposition is more complex; discuss the transaction with a tax advisor.

There are important differences between capital property and ECP. There is no equivalent to a capital gains reserve in the ECP regime, for example, meaning that the seller must pay the tax on the full terminal allowance in the year of closing.