Case Study: Things to consider when adding a child as a joint owner of a property

When estate planning, many people will have to consider whether to add their adult children to the title of their assets as a means to manage the asset, simplify their estates, and mitigate probate fees. Adding a person to title without changing who is the beneficial — or real — owner results in a situation where the adult child may be acting as an agent, or a bare trustee, of the property.

However, a new filing requirement came into effect on December 31, 2023, requiring additional filings with the Canada Revenue Agency (CRA) for trusts, including bare trusts, which can result in an ongoing compliance cost. To consider the implications of this decision, let’s review a hypothetical family’s situation.

The hypothetical family’s situation

Margaret lives in the Annapolis Valley in Nova Scotia. She recently sold her principal residence and moved into a retirement community that will provide support for daily tasks. She continues to own a family cottage in Lunenburg that she and her husband purchased in 1999 as a family retreat.

Margaret’s husband passed away 10 years ago and she is the only name on title for the cottage with the land registry. As part of her estate planning process, she has decided to gift the family cottage to her adult daughter, Ava, in her will.

In Margaret’s research, she learned she could add Ava to title now to make it easier to transfer the property on Margaret’s death while saving probate fees. Margaret would retain full beneficial ownership of the property up until her death. Margaret will write a Letter of Intention that specifies she will retain sole beneficial ownership during her lifetime and names Ava as the joint tenant for estate planning purposes only.

The pros

Ava will have joint title to the property once she is added to title. Items that have joint ownership or have a named beneficiary pass outside of the estate, so these items aren’t included in the calculation of probate fees, which are based on the total value of the estate.

Potential downsides

If Margaret adds Ava to title while retaining full beneficial ownership, she is not actually making a true gift or selling the property to her daughter at the time. Margaret will have 100 percent of the beneficial ownership, but legal ownership will be split with Ava, which may create a resulting trust that is often referred to as a bare trust.

In the past, there was no need to file a tax return for a bare trust. For years ending after December 30, 2023, there is a requirement to file a tax return to the CRA for bare trusts. There will be an ongoing compliance cost to file the return, so Margaret may not see the net savings she anticipated from reduced probate fees. If the return isn’t filed by the due date (90 days after the December 31 year-end), there is a potential for significant late filing or failure to file penalties, which can be the greater of $2,500 or 5% of the value of the assets, in this case the cottage.

Adding a person to title can also create land transfer fees in certain provinces, which would have to be quantified and considered in the overall plan. Additionally, Margaret may not be able to refinance or sell the cottage without Ava’s approval.

It is recommended that Margaret document her intentions clearly to remove any ambiguity about whether the cottage may be considered to be Ava’s cottage for her own use and enjoyment. Lack of clarity can create uncertainty in a division of assets for matrimonial purposes, or if creditors try to seize the asset.

While this is not Ava’s asset, questions could arise about whether Ava may also be able to use the property as collateral on a loan, which may not be in Margaret’s best interests.

Other options

If Margaret is not concerned about probate fees, she could accomplish many of her goals with a power of attorney.

Moving forward

Margaret and Ava need to be aware of the new CRA filing requirement and ensure that the plan for joint tenancy won’t put Margaret, or her other beneficiaries, in jeopardy.

Ava, as the trustee, would be obligated to file the tax return for the bare trust, and provide information to the CRA that would not be otherwise required.

Every family’s situation and needs are unique. We suggest you consult with an experienced tax advisor and legal counsel to develop and monitor your estate plan to ensure it continues to meet your and your family’s needs.