Joint Accounts: Understanding The Risks

Many people own property and investments jointly with another person, most commonly a spouse.  But when a joint account is used with individuals other than a spouse there are risks that need to be understood.

There are two ways that a joint account can be held: joint with right of survivorship and tenants in common.

Joint Account With Right Of Survivorship

This is the most common type of ownership, also called joint ownership.  Each owner has an undivided and equal legal interest in the account.  Each owner can withdraw money and make investment decisions without the other’s consent.  On the death of one owner, the account will belong entirely to the other, avoiding probate fees.

Tenants In Common

With this type of ownership, the owners may each own an equal or unequal portion, but each owner retains rights to his or her share of the joint account.

An example of this is two friends that are roommates.  According to LegalZoom (a legal firm), they open a joint account to pay the rent and other living expenses.  If one friend should die, his or her portion of the account would then belong to their estate and be distributed according to the instructions in the will, or by the intestacy rules of their province if there is no will.

Tax Consequences Of Making A Joint Account

If an account is made joint at a later date it is considered a change in ownership (beneficial interest).  This can result in a “deemed disposition,” which is treated by CRA like a sale of half of the account to the other person at fair market value.  If investments have increased in value since they were originally purchased, a capital gain is realized (even though it is not sold) and tax has to be paid by the original account holder.

Estate Consequences For Joint Accounts

Often a parent will make a joint account with a child for the main purpose of making is easier for the child to access the money or make investment decisions on the parent’s behalf (legal interest), but there is no intention of giving the child real ownership.

For estate purposes you must clearly document whether the account is a gift to the child, or still part of the estate.  Otherwise, the account will pass to the child and can cause legal problems if other children or beneficiaries contest it.  It can also put the assets at risk of the child’s creditors as well as claims from the child’s spouse.

Including A Child On Your House Title

In some cases a parent will add a child on to the title of their house to simplify estate distribution and also to avoid probate.  This can have unintended consequences.  While any capital gain on the sale of the home that is the principal residence is tax-free, an individual can claim only one residence as a principal residence.

Consequently, when a child is added as a joint owner and the child has his or her own home, there is a risk that the child will be liable for capital gains tax on the portion of the home that they own.

If you are considering adding a child as a joint owner on your assets, it is best to seek legal advise to determine if this is the best course of action.

Consider using a power of attorney for property instead, to give a child authority to act on your behalf without transferring legal or beneficial title.

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  1. krantcents on December 22, 2011 at 11:35 am

    Before you share a bank account or buy property together, you should really think about your partnership much more. Many people treat these choices lightly! In the past, I had two business partnerships and I was very careful who I wanted to be in business with. Once it was set up, all checks over $500 required both signatures. We established this with the bank. Joint tenancy or other ownership forms should not be taken lightly because one owner can sell the property. Bottom line, it is a little like getting married!

    • Boomer on December 23, 2011 at 10:35 am

      @krantcents: You’re absolutely right. People do tend to be too trusting. I’ve seen many cases of partners taking off and wiping out bank accounts and even children doing the same with their parents’ accounts. You just don’t think it will happen to you.

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