TAX WARNING! Capital gains triggered on death and implications on joint tenancy estate planning tool

Topics covered:

  • Everything is deemed to have been sold at market value and repurchased on death, triggering capital gains
  • Joint ownership tax problem – no owner-occupier capital gains tax exemption for non-resident joint owner
  • Joint ownership tax problem – estate (other beneficiaries) pay capital gains tax on testator’s joint ownership interest of non-home property held before death, even though that joint interest passes to survivor.

I slipped it in…a brief tax warning at the tail end of my last column.

Unfair to those struggling to stay awake to the bitter end!

Let’s hit it head on. Buckle up.

But first, if you’re new to my column please read my last two which explain how joint ownership can sidestep probate.

Canada is a fantasy land. A little fairy pops out the moment before we die and waves their magic wand.


Everything we own has been sold and repurchased.

I’m not making this up.

Who did we sell everything to? The fair value monster.

The monster pays us fair market value for everything we own.

The home Greg paid $440,000.00 for 10 years ago?

The moment before Greg passes away, the fair value monster purchases it for $900,000.00, the exact amount it would sell for if listed for sale.

Brilliant! No real estate commissions!

But Greg doesn’t get to keep the cash. The party “poofer” is that Greg immediately buys it back for the exact same amount of money.

What does that have to do with tax?

That fanciful little transaction triggered a capital gain.

A capital gain is when you earn money by selling something at a higher price than you bought it for.

The capital gain Greg earned on the fanciful sale of his home was $460,000.00 ($900,000.00 market value minus the $440,000.00 he paid for it 10 years ago).

Thank goodness for the homeowner’s exemption or Greg would have to pay a boatload of tax on that massive capital gain.

Well, not Greg. He’s dead. That tax would be paid out of his estate.

But what if, when Greg purchased his home 10 years ago, he had cleverly transferred title so that it would be held in joint tenancy with his daughters, Maria and Grace, so they would avoid probate fees?

Over those 10 years, Greg owned only 1/3 of his home. As such, the little fairy trick triggers the homeowner exempt capital gain on only the 1/3 owned by Greg.

The joint tenancy trick works. Maria and Grace get the home fully in their names without having to pay probate fees.

But the massive capital gain on the 2/3 of the home Maria and Grace have owned for those 10 years has not yet been triggered.

That massive capital gain will be triggered whenever Maria and Grace sell the home, and they will have to pay an amount of tax that makes probate fees look like chicken feed.

Does this sound complicated? It gets much, much worse.

Let’s change things around. Instead of an owner-occupied home, it’s Greg’s Big White condo. No homeowner exemption.

And Greg puts the condo in joint names with only Maria because he has other assets of similar value that he’s going to give to Grace in his will.

Maria is happy with getting a $900,000.00 condo because she and her family love to ski.

Grace is happy as well, because she doesn’t like to ski and is getting $900,000.00 of other assets

Hopefully they’re both sad about losing their dad, though!

The moment before Greg dies, the fairy trick triggers a capital gain on Greg’s 50% ownership of the condo. That’s a capital gain of $230,000.00 (50% of the $460,000.00 calculated above).

Whose capital gain is that? It’s Greg’s. And it’s paid out of his estate. That means it’s paid out of the $900,000.00 that was supposed to go to Grace.

Not quite what Greg intended!

I’ve scratched only the surface of consequences of Canada’s little fairy, and only as related to real estate. The fairy’s wand applies to all assets: RRSPs, investment accounts, you name it.

And the fairy doesn’t care about unfairness. There is a risk, with shares in closely held companies, of the fairy trick resulting in tax being paid twice on the same gain!

My head spins when delving into the nuances. And the clever strategies that estate tax accountants come up with to circumvent the fairy.

If you’re feeling the pressing need to consult with an estate tax accountant, I’ve achieved my goal.

Unless you’re way smarter than me and have the time to learn and stay up-to-date about the ever-changing tax laws, it’s dangerous not to get estate tax advice to avoid unfairness and ensure your estate passes the way you intend.

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