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Owning a Home Jointly with a Child – More Trouble than it’s Worth?

In Ontario, on an application for a Certificate of Appointment, the applicant must pay Ontario Estate Administration Tax (also known as “probate tax”). Probate tax is levied at an approximate rate of 1.5% on the gross value of the estate. Assets passing outside of an estate, such as jointly-owned assets, are not included in the gross value of the estate and are therefore not subject to probate tax. In an attempt to avoid probate tax, a parent sometimes might think that a transfer of his or her home into joint ownership with a child is an appropriate option. This approach, though, can lead to several undesirable consequences and should only be done after thoughtful consideration of the ramifications.

On a transfer of a home into joint ownership with an adult child, the law presumes the parent did not actually intend to gift the home to the child. As a result, on the death of the parent, the child would be considered to hold the home in trust for the parent’s estate and consequently the value of the home would be subject to probate tax (unless the above presumption is rebutted, as discussed below). As well, the home would then be dealt with in accordance with the parent’s will. 

The above result would not follow if the child could produce sufficient evidence, such as a deed of gift, to show that the parent intended to gift the home to the child. Where the evidence is ambiguous, disputes often arise as to who is entitled to the home, especially where only one child among several was made a joint owner of the home.

If the evidence clearly suggests that a gift was intended, the home will pass outside of the parent’s estate and should therefore avoid probate tax. While probate tax will be saved, this approach is not without its downsides. Most notably, on a future sale of the home, the child will not be able to use his or her principal residence exemption to exempt the gain on the sale unless he or she ordinarily inhabits the home. If the parent were the sole owner of the home on death, his or her estate would normally be able to claim the exemption to exempt the entire gain on the home up to the date of death. The effective result is generally that any gain in the home from the date of the transfer until the date of the parent’s death will now be taxed in the child’s hands on a future sale.

Even if the child could claim the principal residence exemption (which may be the case if the home were instead a cottage that the child used), the child would then have to choose between claiming the exemption on the cottage or on his or her own home since taxpayers can only claim the exemption with respect to one residence in any particular year.

In addition, as a joint owner of the home, the child could apply to court to force a sale of the home and the child would then be entitled to one-half of the net proceeds of sale. The child could also potentially block a sale of the home since joint owners must agree to a sale (the parent, though, could apply to court to force the sale). As well, the child’s interest in the home would become subject to claims of his or her creditors and possible matrimonial claims arising on marriage breakdown and on the death of the child.

Given the above issues, professional advice should be obtained prior to any transfer of a home into joint ownership. An advisor can help assess whether the transfer makes sense in the circumstances or whether other planning options, such as transferring the home into an alter ego trust, may make more sense. Once the plan is determined, the advisor can help ensure the plan produces the intended legal result.

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.