If certain assets can be excluded from the estate, it can greatly benefit the estate’s beneficiaries by reducing both CRA obligations and Ontario’s Estate Administration Tax (EAT). Real estate, which often forms a significant part of the total estate value, is particularly important in this regard. This blog outlines three key considerations for transferring property before death.
When a testator adds a family member (such as a child) to the title of their property during their lifetime, this joint tenancy arrangement allows the property to bypass the estate., however, the potential downsides of joint ownership with right of survivorship are:
- Loss of exclusive control
- Any changes to the property will require the child’s consent.
- Exposure to the child’s creditors
- For example, if a parent adds a child as a joint tenant of a house and the child owes money to CRA, CRA could place a lien on the property.
- Matrimonial home complications
- If the gifted house qualifies as the child’s matrimonial home, joint tenancy may be deemed severed, meaning the son or daughter-in-law could claim half of the property.
- Taxable disposition
- If the gifted property is an investment property, the parent may trigger a taxable disposition, leading to a large tax bill.
- Loss of principal residence exemption
- If the gift involves the testator’s principal residence, transferring ownership could result in the loss of the principal residence tax exemption.
Pecore v Pecore [2007] established a presumption of a resulting trust, meaning that, in a legal dispute, the jointly held property may be presumed to be held in trust for the benefit of all children, unless clear evidence proves otherwise. To avoid this, the testator must clearly document their intentions and, if necessary, go to the measure that handls jointly owned property through a second will to avoid probate.
- The Succession Law Reform Act (SLRA) gives beneficiaries the right, in certain situations, to the property that substitutes for the original bequest in the will. In the absence of evidence to the contrary, the beneficiary is entitled to the replacement property of what was initially gifted. Example, when a testator leaves a farm to his brother, and before passing, the testator enters into an agreement to sell the farm for $300,000:
- If the testator dies before closing and the $300,000 is paid in full, the brother is entitled to the $300,000
- If $100,000 is paid upfront and the testator holds a mortgage for $200,000, the brother is entitled to the mortgage receivable for the $200,000.
- The Substitute Decisions Act (SDA) contains a special anti-ademption rule that provides:
- IF
- specific property of a person who is incapable of managing property is the subject of a bequest or devise in that person’s will; AND
- that property is disposed of by the person’s attorney under a continuing power of attorney or by a guardian of the person’s property.
- THEN
- unless the person’s will has evidenced a contrary intention, the beneficiary who was to receive the specific property will receive from the residue of the estate a sum of money equal to the proceeds of disposition of that property, without interest.
- IF
- Additionally, if the testator disposes of property before death, the estate should clarify who is responsible for the resulting capital gains tax. For instance, if an investment property was gifted to a brother in the Will, but sold before death with a $600,000 capital gain, should the beneficiary or the residuary estate cover the tax? Absent clear instructions, the tax liability typically falls on the residuary estate.
Here what we are discussing is a family home or cottage, not a matrimonial home.
Problems may arise if, for example, the deceased has five children, and they all want the cottage.
The estate trustee’s duty is to convert non-income-producing assets (such as a non-rented cottage) into income-generating assets. Unless expressly instructed otherwise, the trustee will be obligated to sell such properties and invest the proceeds.
Points to consider:
- Minor children
- Should the family home be left available for minor children? At what point, after they reach the age of majority, should they vacate the home or sell it?
- Adult children living at home
- Should adult children be allowed to remain in the family home after the testator’s death? How should the estate trustee handle the sale of the property in such cases?
- Distribution among children
- What if the testator intends to leave the house to one child as their share of the estate? A potential issue could arise if the home’s value exceeds that child’s share. For example, the testator originally intended to leave $1 million to a child but later decides to leave the house, which is worth $2 million upon their death. One common solution is for the child to buy out the other children’s shares.
The testator must also consider whether to leave the home to multiple children as joint tenants or tenants in common. Joint tenancy could lead to future disputes, requiring the children to spend further time, money, and effort to sever the title and convert it to tenancy in common.
Final Important Note
Although this series focuses on DIY will-making, if your personal circumstances, family situation, or asset structure are complex, we recommend seeking assistance from a licensed solicitor specializing in wills and estates.