Joint ownership

Prudence, perks & pitfalls in property transfer

Joint ownership is often the way that spouse/common-law partners (CLP) will own their matrimonial home, a recreational property and maybe other real estate held for investment. But when other owners are contemplated to be involved – for example, adult children – another arrangement may be more appropriate, including just leaving well enough alone.

Compared to tenancy-in-common

There are two common ways that property is owned by more than one person, joint ownership and tenancy-in-common, with a few key features distinguishing them:

Probate avoidance

Probate is the tax or fee charged by a court for confirming that a submitted Will is valid for the named executor to deal with a deceased person’s estate. The formal name varies by province. Some provinces just charge a flat filing fee of a few hundred dollars, and in others it can be up to about 1.5% of the value of the estate property.

The choice between the types of property ownership is often influenced by a desire to avoid probate. Specifically, the right of survivorship under joint ownership allows for the interest/rights of a deceased owner to bypass his/her formal estate, thereby avoiding probate.

While probate could total up to a significant dollar figure when viewed in isolation, it is usually a relatively small proportion of the cost of administering an estate, and there are trade-offs to consider before deciding to proceed.

Couples’ preference for joint ownership

Spouse/CLPs usually intend the other to be the primary or only beneficiary of their estate. Joint ownership can therefore simplify the estate by passing selected property outside the Will. This can put things beyond the reach of a Will challenge, insulate against estate creditors, and again escape any probate fee/tax.

In addition, appreciated property can pass between spouse/CLPs at its cost base, allowing couples to add one another to title without triggering a tax bill on the capital gain.

Involving adult children – Tread carefully

As children are usually the next stage of beneficiaries after a spouse, it may at first seem a good idea to add one or more as joint owners with the parents, or after one parent dies. While this may indeed streamline the legal transfer, it is an action that should be balanced with other legal, financial and practical considerations.

Income tax effect of transfer to joint ownership

Unless it is clear that the parent retains the beneficial rights to the property, tax will generally be triggered when a non-spouse is added. For example, if two parents add their adult child as a joint owner on an investment property, they are deemed to dispose of 1/3 of the property, thereby triggering tax on 1/3 of the current capital gain. A tax professional can advise the parents on appropriate steps and recordkeeping if they wish to avoid this result.

Relief and risk if it is a principal residence

A variation of the example above would be to put a child on title of the parents’ principal residence. While their principal residence exemption (PRE) may protect against capital gains tax when the child is added, if the property is not also the child’s own principal residence, future capital gains on the child’s portion may very well be taxable.

Legal and registration cost

Costs of transfer should be balanced with expected probate tax savings. According to province (and even regions within), taxes or fees on land transfers may be flat charges or be based on a percentage of the property value. Transfers to a spouse/CLP are often exempt, extending in some provinces to certain intra-family transfers.

Exposure to creditors of other joint owner(s)

If an added child runs into debt problems, creditors may decide to take legal action against the property. While the creditors’ claim will be limited to that child’s interest, if neither parents nor child have other assets to satisfy the claim, the creditors could force sale of the property to collect the amount due.

Matrimonial law implications

Adding a child as a joint owner may expose their interest to a property equalization claim on a later relationship breakdown. In most provinces if it is a gift to the child, then in principle it is not exposed, but this could be affected by how the property is used thereafter. In Ontario for example, a recreational property that is regularly used by a married couple may be considered a matrimonial home, making the value of the ownership interest equalizable.

Legal or beneficial transfer, and estate complications

When an adult child is gratuitously added as a joint owner, that is presumed not to be a beneficial transfer. On the parent’s death, the child holds the property as trustee for the estate beneficiaries. The presumption can be rebutted if the parent expressed otherwise at the time of the transfer, ideally in writing. This would be particularly important if there are other siblings not on title, especially if there is any existing family tension. Otherwise, the onus is on the child to prove to a judge that the parent intended that that child personally succeed to the property.

Application to financial accounts and other personal property

Property means something that can be owned, whether that’s real property (or real estate) or personal property. Personal property covers moveable things, including financial instruments like chequing and savings accounts, and non-registered accounts holding GIC/term deposits, individual marketable securities or mutual funds.

Joint ownership can also be used with personal property. As with real property, this can simplify and streamline estate transfers between spouse/CLPs, and where others are involved the cautions above again apply.

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

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.
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.
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.

Claims against the legal title to a cabin, cottage, camp or ranch

At issue

Summertime … and the livin’ is easy – or at least that was the hope when the family vacation property was acquired.

Whether it’s the cabin, cottage, camp or ranch, there is emotion tied up in such places. And as usage rolls through to the next generation and beyond, conflicts can arise, feelings of entitlement can grow, and ultimately property claims may be asserted.

One such type of claim is the doctrine of proprietary estoppel, which could apply to any real estate, though it seems to play out more prominently with vacation properties in the case law. Someone who has made a financial contribution and emotional commitment claims to have rights to the property, despite not being on the legal title.

Willmott v. Barber (1880), 15 Ch. D. 96

The doctrine of proprietary estoppel was recognized in British courts as early as 1866, and by 1880 a formal test had developed. Assuming a male claimant against a female titleholder for illustration, the “five probanda” would have to be proven:

he mistakenly thought he had a legal right,
he spent money on the property based on that belief,
she knew the extent of her own rights,
she knew of his mistaken belief, and
she encouraged or acquiesced to the expenditure.

The test has been applied in Canada many times in the century and a half since.

Schwark v. Cutting, 2010 ONCA 61

This Ontario case involved owners of “lakeview cottages” claiming the right to pass across and use the land of a beachfront property owner. The parties had a running dispute over 20 years or more, though the beachfront owner had for a time granted access in exchange for his own family’s use of stairs constructed by the lakeview owners to reach the beach.

For our purposes, the important development is that the Ontario court somewhat simplified the test for proprietary estoppel (as UK courts had done about 30 years back), requiring only that there be:

encouragement of the plaintiffs by the defendant owner,
detrimental reliance by the plaintiffs to the knowledge of the defendant owner, and
the defendant owner now taking unconscionable advantage of the plaintiff.

In the result, the lakeview owners’ claims failed, as they were not under any mistaken belief as to their legal rights. The beachfront owner had granted permission for a time, but there was nothing unconscionable about an owner withdrawing permission.

Clarke v. Johnson, 2014 ONCA 237

Whereas Schwark and Cutting were arm’s length parties, this most recent case involves a single property with family connections among the litigants.

1n 1971, William and Martha Johnson purchased an island on Lake Panage near Sudbury, Ontario, which was termed ‘the camp’. In 1979, title was transferred to be held as one-third tenants-in-common with William’s two siblings. After William’s death in 2009, Martha continued as sole owner of a one-third interest.

Donald Clarke was married to the Johnsons’ daughter Victoria when, beginning in 1974, he built a dwelling and later added other buildings and improvements. The couple had two children, Misty in 1976 and Westley in 1977. Donald and Victoria separated in 1991, but Donald continued to use and manage the camp.

Donald’s son Westley returned from western Canada in 2009, desiring to make use of the camp. After some confrontation, Donald prohibited Westley from the property, following which Martha prohibited Donald from the property.

Supported by the other two legal owner families, Donald successfully claimed proprietary estoppel. The court determined that he would have succeeded whether using the formalistic historical test or the simplified test in Schwark v Cutting. Donald was granted a constructive trust to “regulate use during his lifetime or until he could no longer attend at the camp.”

Practice points

Though the executor may have broad authority pursuant to provincial law, this is not absolute in nature. There remain a number of obligations under common law that an executor must bear in mind when exercising the authority, the nuances of which can be discussed with a lawyer if problems appear to be arising:

Legal title is important, but it should not be assumed to be all encompassing.
While the more formal test expressed in Willmott may not be required in Ontario, even the streamlined test presents a significant hurdle to a would-be claimant. On quick review of case law, it appears that other provinces may also be backing away from the more stringent test, as may be confirmed with one’s own legal advisor.
Legal disputes can be costly. In the appeal phase alone, $21,800 costs were assessed against the appellant, which would be in addition to her own legal bill.