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tax matters

At our cottage north of Toronto, we have a neighbour – Ruth. We can all learn from her story. Ruth has five adult children: Paul, Judy, Ron, Kathie and Peter. A few years ago, she put the cottage into joint ownership with her oldest son, Paul. The reason? To avoid probate fees and facilitate a quick and easy transfer upon her death.

While Ruth is at the cottage all summer, the kids aren’t using the cottage much. Judy, Ron and Kathie live outside of Ontario and rarely visit. Peter isn’t interested in the cottage and Paul’s work doesn’t allow him to make it to the cottage more than two or three weekends each year. Paul wants to sell the cottage given the capital improvements that will be required in the next couple of years.

There’s a potpourri of problems Ruth is facing today because of the joint ownership with Paul. Let me share the three key problems.

Loss of control

Ruth doesn’t want to sell the cottage. As a joint owner, Paul can’t simply sell the cottage without her consent. But if there was a sale, Ruth has always assumed that she’d be entitled to the sale proceeds. This intention wasn’t made clear to anyone. There’s no written agreement between Ruth and Paul. Paul believes that his mother was giving him half the cottage when she put it into joint names. So, if they do sell, it’s not certain that Ruth will end up with all of the sale proceeds. Paul may have a right to keep his half.

Ruth lost control over the cottage when she put it into joint names. Fortunately, there’s no squabble over access, shared use, using the property as collateral, or payment of expenses related to the cottage. If these were issues, Ruth wouldn’t have control of the property to resolve them on her own.

As for Paul, he’s going through a divorce, which is causing him much financial stress and his ex-wife is claiming that she should be entitled to half the value of the cottage. As a result, he’s now threatening to sever the joint ownership. A joint owner has the unilateral ability to sever the joint ownership, which will create a “tenancy in common” arrangement. Under a tenancy in common, Paul would then own an undivided 50-per-cent interest in the cottage. He’d be free to do with his half of the cottage as he pleases. He may try to sell his half or give it to his ex-wife – perhaps to help settle the claims in his divorce. Ruth could end up owning half the cottage with some other person she doesn’t even know, or Paul’s ex-wife.

Exposure to creditors

Placing an asset into joint names will expose that asset to the claim of creditors of the new joint owner. In Ruth’s case, Paul is not facing the claims of creditors – fortunately. But he’s going through his divorce and his ex-wife is claiming that his half of the cottage should form part of the property that should be split between them.

While it’s true that most gifts to a child after their date of marriage would fall outside of the family property to be divided on a divorce, this protection can be lost if the property qualifies as the child’s matrimonial home. In Paul’s case, his ex-wife is claiming that the cottage is a matrimonial home – and she’s likely correct. Each province has its own rules around matrimonial homes in the case of divorce, so speak to a local lawyer about it. As a minimum, family law legislation is likely to affect the ability of a joint owner to deal with a property that is considered a matrimonial home.

Unequal treatment of heirs

It’s always been Ruth’s intention that, when she’s gone, the cottage would be either shared by the kids, or sold and the proceeds would be split equally among them. This intention was never documented. If the cottage isn’t sold during Ruth’s lifetime, there’s no assurance that Paul will share the property with his siblings, or that he’ll divvy up the money if he sells. And so, Ruth’s kids could be treated unequally when she’s gone. A legal battle could ensue as a result.

To add insult to injury, any tax owing on the cottage on Ruth’s death will have to be paid from her estate, which will exclude the cottage. Paul will receive ownership of the cottage automatically, leaving the other kids to pay the tax bill from their share of Ruth’s estate.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at

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