Joint Accounts

Joining Accounts and Houses Could be a costly mistake for your family:

 

Parents typically want to leave as much as they can to their children with little headaches.  You need to be careful, there are tax and inheritance traps that can cause problems.

The most common mistakes, result in inheritance conflicts, the payment of additional income taxes and most importantly, prevent parents from achieving their goal of maximizing their family’s wealth.

Houses and cottages

Sometimes people decide to transfer half ownership of their home to one or more of their children. For income tax purposes, these transfers are equivalent to a partial sale. If the house is the parents’ principal residence, there are no tax consequences to the parents. However, if the child has a principal residence of their own, they will likely be taxed on half of any future appreciation of the parents’ home.

Parents should do their research before transferring their house to their children, since the net result is almost always the conversion of a tax-free gain on their principal residence into a taxable gain in the hands of the children, leading to less overall family wealth.

In most cases, a better tax strategy is for parents to keep the house in their name until they die.

Bank accounts

As parents age, it is common for one of them to change their bank account to a joint account with one of their children, to avoid getting hit with probate fees. Despite creating a joint account, these parents often continue to report the income from the bank account on their own tax return. They typically just want to avoid probate fees and not actually transfer half the bank account to their child.

This can be a mistake. Canada Revenue Agency has said that when someone changes the name on a bank account, and still has beneficial ownership of the bank account, there is no true joint tenancy and the transfer will fail to reduce probate fees.

Unless you transfer true ownership of the bank account – one indication of this may be your child reports half the income on their return, you have not minimized your probate fees or maximized your family wealth.

There are many aspects to joining accounts/houses to take into consideration.  Please contact us or your lawyer if you have any questions on this topic.

Jay Newton BA, CLU, CHS, EPC
Wealth Advisor
Newton Financial
Worldsource Financial Management Inc.

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