A client will often request that an account be registered in the names of the client and another person as "joint owners". Joint owners (sometimes also called "joint tenants") have undivided interests in the property and rights of survivorship, so that on the death of one joint owner the other automatically becomes the surviving owner. Please note that the concept of joint ownership does not exist under the Quebec Civil Code, so the comments in this memo are inapplicable to our Quebec clients.
One of the advantages of joint ownership is that jointly owned assets do not form part of the estate of the deceased for probate purposes, thereby avoiding probate fees on the value of the asset and delays associated with obtaining probate in order to settle the account. As a result, joint ownership is becoming more popular as an estate planning tool in these days of increased probate costs.
There are other issued associated with joint ownership, such as the fact that we will require the signatures of all joint owners in order to transact business on a jointly owned account, and that the attribution rules may apply to income earned and capital gains realized on the account. All relevant factors should be considered by the client before using joint ownership.
An issue that we wish to emphasize is that there are potential tax consequences to adding a joint owner to an existing mutual fund account (or to any other capital asset, including certificate contracts). By adding a joint owner to an existing account, you are deemed to have disposed of part of your interest in the account. If there are accrued capital gains associated with the account, you will have realized a capital gain on the transaction, unless the new joint owner is your spouse.
For example, if a mother adds her son as joint owner of her Investors Japanese Growth Fund account, she is deemed to have disposed of half of her interest in the account for proceeds of disposition equal to the fair market value of half of the account as at the date of adding the son as joint owner. If mother adds her son and daughter, she is deemed to have disposed of two-thirds of the account for proceeds of disposition equal to the fair market value of two-thirds of the account as of the date of the change of ownership, with the son and daughter each having been gifted a third of the account. The difference between the fair market value of the portion of the account disposed of and the adjusted cost base of that portion of the account will be a capital gain, three-quarters of which is subject to taxation. On the other hand, if the new joint owner is the client's spouse, there is a deemed disposition, but spouses are allowed to transfer capital property to each other at adjusted cost base, so that a rollover occurs and there are no capital gains consequences (unless they elect to have the transfer occur at fair market value and trigger a capital gain).
After the transfer to joint ownership, the parties are viewed as equal owners and should report subsequent income on the account accordingly, subject to the attribution rules. So, in the example, where mother added her son as joint owner, if the son was an adult there would be no attribution and Revenue Canada would expect the mother and son to each report half of the income subsequently earned on the account for income tax purposes. If the son was a minor there would be attribution of the income earned on the son's interest in the account back to the mother (attribution would not apply to income earned on the reinvestment of the income, as per Chapter 10 of the Tax Library, nor to capital gains on the son's half of the account, but it would be difficult to identify the non-attributing income for tax reporting purposes). If the new joint owner is the spouse the attribution rules would again apply (unless the spouse had actually paid for their half interest in the account) and subsequent "simple" income and capital gains on the half interest held by the new joint owner would attribute back to the client, so the effect of adding the spouse as joint owner would be minimal for tax purposes.
Clients sometimes ask whether there is any way that the deemed disposition can be avoided on the addition of non-spouses as joint owners to existing accounts. Some tax lawyers use agreements in these situations providing that the new joint owners are being added for survivorship purposes only, or that they hold their interests as trustees for the original owner. The intent of the agreements is to establish that either there has been no disposition or that the only "right" disposed of was the right of survivorship (which would be difficult to value). There are other legal issues associated with the agreements, which must be carefully drawn for tax reasons and to ensure that they are enforceable for testamentary purposes. Some tax professionals also are of the opinion that you may establish by agreement an arrangement under which the income earned on the account will not be shared equally between the joint owners, and this is something that again should be discussed by the client and their tax lawyer if the client wishes to attempt to establish such an arrangement. Whether joint ownership agreement will be effective to defer capital gains taxation or provide unequal sharing of income between joint owners is something on which the client would have to be advised by their lawyer. These agreements would not be sent to Investors, who would be entitled to view all joint owners as equal owners with full rights of survivorship.
As a result, if your client wants to add someone other than their spouse as a joint owner to an existing mutual fund account on which there are accrued unrealized capital gains, you should tell the client that there are potential capital gains consequences as outlined in this bulletin. If the client wants advice on whether a joint ownership agreement would be of benefit to them, they should consult a tax lawyer before adding the joint owner, for advice and assistance given their particular circumstances. If a joint owner is added to an account with Investors, we will view the new joint owners as equal owners with full rights of survivorship. As with all jointly held accounts, one tax slip for future income on the account will be issued in the names of all joint owners and it will be up to the joint owners to determine the appropriate manner in which income should be reported for tax purposes. We are reviewing our tax reporting to ensure that the appropriate information slip will be issued to the original owner when they add a joint owner to their account.
The bottom line is that clients should be cautioned to give some thought before adding joint owners to their accounts, to ensure that they are aware of the consequences of their actions.
The purpose of this article is to inform you of current developments, not to provide legal advice. Clients should consult their professional advisors for advice based on their specific circumstances. If you have any questions, please contact Advanced Financial Planning Support, Dept. 108, Phone number (204) 956-8585; Fax (204) 943-0021.