Two sides to Joint Ownership of the House with the Children
Parents who solely own a house or cottage think about changing the ownership of these assets to include their children. While there may be sentimental or economic reasons for doing so, care must be taken to understand the full consequences of such a decision.
Loss of critical tax credits for both the parent and child are important ramifications. Preliminary exploratory discussions with a tax lawyer or accountant are a good first step.
In the midst of a separation and pondering protecting assets by transferring ownership to the children is a huge minefield. Think twice as the negative inferences against such an act will certainly backfire in Ontario.
Understanding the terminology:
- Joint tenancy: Shared ownership of the same property by two or more persons with a right to its full use and with a right of survivorship. Upon the death of an owner, the share owned by the deceased is automatically acquired by the survivor.
- Tenancy in common: Shared fixed interest in the same property with a right to the full use of that interest. Upon death of one owner, with no right of survivorship, the deceased’s interest may pass under the operation of a Will to be distributed as a legacy. There is a possibility that complete strangers could jointly own and use the same property.
Reasons to Share Ownership with a Child:
- To preserve the family home for future generations. Many feel that a family home passed down a family lineage is worth treasuring and kept within the control of the family.
- To provide an immediate transfer of property held in joint tenancy to a child upon the death of the parent thereby bypassing the use of a Will.
- To protect financial resources by avoiding the Ontario government’s estate administration fees (formerly probate fees) calculated on the gross value of assets at the time of the owner’s death. Sharing in the ownership of what is usually the adult’s highest valued asset will help reduce the government’s share and leave more in the estate for beneficiaries to share.
Reasons to be Cautious about Changing Land Ownership
If in the throws of a separation or contemplating breaking up the family unit, reconsidering defeating a spouse’s right to a share in the value of the family property, you are forewarned to seek the legal advice of a family law lawyer. Such actions will not be seen in a positive light.
- Joint tenancy requires all owners to agree in writing for any future refinancing, encumbering of the title, or sale of the property. A child under the age of majority cannot legally own property and will require a legal representative to make decisions in the child’s best interests. Involving children in a family business or refinancing decisions may be inappropriate in the eyes of the law. If cash flow becomes an issue in the future serious repercussions may result.
- A conveyance of property to defeat business or personal creditors, including a former spouse of equalization of marital property, will likely be met with costly litigation and unintended consequences.
- The transfer of one-half interest of a house to a minor child is simply taxed inefficient. The child as co-owner may lose the tax advantages of the (2012) $5,000 Land Transfer Tax Credit http://bit.ly/15OlMrl and the Home Buyer’s Plan (HBP) http://bit.ly/19kS03k available for first-time homeowners. There will be a 50% loss of the principal residence exemption claimed for as long as the adult habitually resides in the house with the minor child. This partial exemption could impact the taxes payable by the estate if the adult predeceases the child during their residency in the house.
- Once ownership has been shared with a child, the adult co-owner loses control to be able to dispose of the property. As time passes, and if the value of the property increases, the child may unwilling to sell his or her half interest in the property.
- Potential beneficiaries may be uncomfortable with what may be perceived as a premature distribution of a parent’s or sibling’s estate to a minor child, one of many children or family members entitled to expect an inheritance.
Before taking the step to change ownership, there may be other options for the immediate future and the long run which meet the client’s goals, maintain control over the land, and with a more tax-efficient result.