Joint ownership is common, easy and cheap to set up and surprisingly complicated in practice. Ontario charges estate administration tax at the rate of 1.5% per on the date of death value of the assets in an estate. It has become increasingly common for people to try to avoid this tax by putting assets in joint ownership with an adult child. Often, but not always, that adult child is expected to share the jointly owned assets with his or her siblings. Sometimes the joint owner does not meet the expectations of his or her parent. In other cases, where the joint owners are different than the heirs under a Will, the heirs may argue that the account belongs to the estate – not the joint owner and his or her siblings. Two recent cases in the Ontario Court of Appeal – Mroz v Mroz and Sawdon Estate – explore these possibilities, and highlight how important it is for advisors to understand the principles governing joint ownership of accounts and to properly document their customer’s intention when they set up jointly owned accounts. These are paired decisions, as in Mroz the court clarifies the implications of Sawdon, and both decisions spell out the implications of the Supreme Court of Canada’s landmark decision in Pecore v Pecore.
The purpose of this bulletin is to:
- clarify the principles governing joint ownership of property;
- illustrate how complicated joint ownership has become in practice;
- demonstrate that one way or another the courts will not allow joint ownership to be used to defeat the transferor’s testamentary wishes; and
- offer helpful guidance on how to structure joint ownership for the purpose of avoiding probate fees.
In Mroz an elderly mother transferred title to the family home jointly to herself and her daughter, at the same time executing a Will that said the gift of the house was contingent on the “co-owner” selling it within a year of the testator’s death and using the proceeds to pay bequests to the deceased’s grandchildren. The “co-owner” sold the house and kept the proceeds. Applying the Supreme Court of Canada’s Pecore decision, the Ontario Court of Appeal found that the co-owner had to rebut the presumption of a “resulting trust” on gifts to an adult child. A transfer into joint ownership is a form of gifting, and the presumption of resulting trust means that an adult child co-owner is deemed to hold the gifted property in trust for his or her parent. The court decided that execution of the Will was compelling evidence that the deceased had not intended to gift an immediate beneficial interest to her daughter, so in this case the presumption was not rebutted. The result was that the house was an asset of the deceased’s estate governed by her Will. The implication (not addressed in the decision) is that the value of the house would have to be included in calculating the estate administration tax (“probate fees”) owed when the deceased’s Will was probated.
In Sawdon the deceased father put his bank accounts in joint ownership with two of his five children. His Will left the majority of his estate to a charity. He had received legal advice that putting the accounts in joint ownership would “bypass” his estate. On the father’s death the charity claimed that the presumption of resulting trust applied and the accounts formed part of the deceased’s estate, governed by his Will. The Court held that the presumption of resulting trust was rebutted by the evidence, especially the evidence of the deceased’s lawyer and the bank employee who documented the transfer of the accounts to joint ownership. The deceased had effectively created a true trust for the benefit of his children. The terms of the trust were that during his lifetime only the father was entitled to benefit from the accounts, but that on the father’s death the beneficial right of survivorship was held in trust by two of the siblings for the benefit of all five. It follows that the accounts were not assets of the deceased’s estate. (The clear implication, although not explicitly addressed by the court, is that the value of the accounts did not have to be included in calculating the value of the father’s estate for probate.) The Court made it clear that the trust applied only to the right of survivorship: during the father’s lifetime, i.e. only he was entitled to use the accounts for his benefit. The implication (not addressed in the decision) is that there was no immediate disposition for tax purposes, and the father alone remained liable to pay taxes on the income from the accounts. It must be said, however, that the tax implications of joint ownership turn heavily on the particular facts of each situation, and customers should be strongly encouraged to seek tax advice before putting assets in joint ownership with their adult children.
Some general implications of these decisions are:
- Institutions need to update their account forms to better clarify what is intended by joint ownership (the account form in Sawdon had been updated in this way.)
- Where a financial institution’s staff has been involved in establishing the joint ownership, care must be taken to release the assets in accordance with the instructions it received. In particular, it is dangerous to assume that only because the account form says “joint” it is therefore not subject to the deceased’s Will and part of the deceased’s estate.
- Where a joint ownership is established and the co-owner is required to fulfill the terms of the deceased’s Will, it will be difficult or impossible to rebut the presumption of resulting trust. The jointly owned asset will therefore likely fall into the deceased’s probate estate.
Sawdon makes it clear that joint ownership may effectively result in a true trust that by-passes the deceased’s Will and testamentary estate. If this is a customer’s intention it is strongly recommended that the transfer be documented in a deed of gift made with the benefit of legal advice that details the terms of trust (i.e. makes it clear that the transferor intends to transfer only the right of survivorship.)