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October 4, 2024

Articles, Resources

Should You Put Your Property in Joint Names with Your Adult Child? Considerations for Parents in British Columbia

As parents get older, many start thinking about how to best transfer their assets to their children. One common strategy is to put a property into joint names with an adult child, especially for a family home. The appeal is often to simplify the transfer of the property upon death and potentially reduce probate fees. While this strategy can have its benefits, it’s crucial to understand the legal and tax implications, especially in British Columbia.

In this blog post, we’ll explore the key factors to consider, including probate fees, property transfer tax, capital gains tax, and the principal residence exemption.

1. Understanding Probate Fees

Probate fees are essentially a form of estate administration tax that is payable when an estate is settled through the court process. In British Columbia, probate fees are calculated based on the gross value of the deceased’s estate:

  • $200 on the first $25,000 of the estate’s value.
  • 0.6% on the estate value between $25,000 and $50,000.
  • 1.4% on any value above $50,000.

By adding an adult child as a joint tenant on your property, you can potentially bypass probate fees on that asset since it will pass directly to the joint owner outside of your estate upon your death. This can save your estate a significant amount of money. However, the benefits should be weighed against the other tax consequences and the loss of control over your property.

2. Property Transfer Tax: A Potential Cost of Adding Your Child as an Owner

Adding an adult child to the title of your property can trigger property transfer tax (PTT) in British Columbia. PTT is calculated as follows:

  • 1% on the first $200,000.
  • 2% on the portion between $200,000 and $2,000,000.
  • 3% on the portion above $2,000,000.
  • An additional 2% on the portion over $3,000,000 for residential properties.

However, there are exemptions to PTT if the transfer is considered a gift and if the property is your principal residence. This exemption applies only if you gift the property to a related individual. It’s important to structure the transaction carefully to ensure that it qualifies for the exemption, as paying transfer tax can add a significant cost to the process.

3. Capital Gains Tax: A Hidden Tax Consequence

If you add your child as a joint owner of your property, you may also be exposing yourself to capital gains tax, particularly if the property is not your principal residence (e.g., a rental property, vacation home, or investment property).

When you add someone to the title of a property, you are effectively disposing of a portion of the property. This means that the Canada Revenue Agency (CRA) may consider the transfer as a sale at fair market value, even if no money changed hands. You could be on the hook for capital gains tax on the increase in value of the property from the time you originally acquired it to the date of the transfer.

Example:

If you purchased a vacation property for $200,000 ten years ago and it is now worth $600,000, adding your child as a 50% joint owner could trigger capital gains tax on the $200,000 increase in value (half of the $400,000 gain). This tax implication can outweigh any potential probate fee savings.

4. Principal Residence Exemption: Protecting Your Capital Gains

If the property you’re transferring is your principal residence, you can use the principal residence exemption to reduce or eliminate the capital gains tax. The exemption allows you to avoid capital gains tax on the increase in value of your home for every year it was designated as your principal residence.

However, it’s important to note that adding your child as a joint owner can complicate matters if your child already owns a principal residence. Since the principal residence exemption can only be used for one property per year, your child may have to choose between exempting their own home or the newly transferred property when they eventually sell it.

5. Loss of Control and Potential Legal Disputes

Finally, adding your child as a joint owner means that you no longer have full control over the property. While this may not seem like an issue in a loving family relationship, it can become problematic if there is a falling out or if your child encounters legal or financial troubles. As a joint owner, your child’s creditors may have a claim against the property. Additionally, the child will have to agree to any sale or mortgage of the property, which can complicate decisions down the road.

6. Preventing Legal Disputes
In British Columbia, the Wills, Estates and Succession Act (WESA) allows spouses and children to challenge the terms of a will if they feel they were not adequately provided for. This is known as a wills variation claim. However, assets that pass outside the estate, such as property held in joint tenancy, are not subject to these claims. When a property is held in joint tenancy, it automatically transfers to the surviving joint owner upon death and does not form part of the deceased’s estate – assuming that the appropriate documents are kept showing that the transfer was for both legal and beneficial interest in the property. As a result, it cannot be challenged through a wills variation claim, making joint tenancy an appealing estate planning tool for some families looking to reduce potential disputes. Some parents may choose to incur the tax consequences for a property transfer to prevent the legal costs of their estate defending a wills variation claim.

Conclusion: Weighing the Pros and Cons

While adding your adult child as a joint owner of your property may seem like a straightforward way to save on probate fees and simplify estate planning, it’s important to carefully consider the potential tax consequences and loss of control. Property transfer tax, capital gains tax, and the intricacies of the principal residence exemption can make the decision more complicated than it first appears.

Before making any changes to the ownership of your property, it’s wise to seek advice from a professional, such as a tax advisor, estate planner, or lawyer familiar with British Columbia’s property and tax laws. This will help ensure that you make the best decision for your family’s unique circumstances.

This blog post provides legal information but is not a substitute for legal advice. If you have a question about this topic or another legal matter, contact Naz Khodarahmi for a complimentary consultation. You can book a consult through www.macushlaw.ca through our booking system, or contact Naz at [email protected] or (236) 476-3188.