Ontario Probate Tax: Should You Add Your Adult Child As a Joint Owner to Your Home or Bank Account?

One tax that often surprises Ontario families is the Ontario Estate Administration Tax, more commonly referred to as probate tax. The Estate Administration Tax ¹ is charged on the value of the estate of a deceased person if an estate certificate is applied for and issued.

The benefit of using an estate planning lawyer to prepare your Will is that they will often advise on probate planning, which involves a review of the type of assets you own and how you own them to determine ways to avoid, or at the very least, minimize probate tax.

The answer is: yes, you can, but that does not mean you should. The strategy is often far more complicated than it appears and involves a number of risks that may end up costing you more.

Understanding Ontario Estate Administration Tax

When a person dies owning assets in their sole name, the estate trustee may need to apply to the Ontario superior court for a Certificate of Appointment of Estate Trustee (commonly referred to as probate). A grant of probate by the court confirms the authority of the estate trustee to deal with estate assets and is often required by financial institutions, the Land Registry Office, and other organizations before assets can be transferred.

When probate is required, Ontario's Estate Administration Tax Act  prescribes a 1.5% tax on the total value of a person’s assets exceeding $50,000 that pass through the estate upon death. So, depending on the total value of the assets, this can represent a significant expense on the estate.

The Appeal of Joint Ownership

To reduce or avoid probate tax, many parents consider adding an adult child as a joint owner of their home or bank accounts. In Ontario, when two or more people own real property as joint tenants, the ownership carries a right of survivorship, so if one owner dies, their share in the property automatically goes to the surviving owner or owners. The same applies to joint owners of a bank or investment account. The property or account therefore does not form part of the deceased persons estate for probate purposes.

While this strategy can be appropriate in certain circumstances, it should never be viewed as a simple "probate avoidance" solution. Adding a child's name to an asset may have significant legal, financial, and family consequences that are often overlooked.

The key risks include uncertainty about beneficial ownership, family disputes, creditor exposure, family law claims, loss of control, and possible income tax consequences.

The Pecore Presumption - Joint Ownership Does Not Always Mean Ownership

One of the most misunderstood aspects of estate planning is that putting a child's name on an asset does not necessarily mean they become its beneficial owner.

The Supreme Court of Canada's decision in Pecore v. Pecore ² established the principle that where a parent gratuitously transfers property into joint ownership with an independent adult child, the law generally presumes that the child holds the parent's interest in trust for the estate, unless there is evidence that the parent intended to make a gift.

The companion case, Madsen Estate v. Saylor ³, reinforces that the parent's intention is paramount and the courts will examine all of the surrounding circumstances, including conversations, documents, and conduct, to determine whether the parent intended a true gift or merely added the child for convenience.

In practical terms, this means that simply adding your daughter's or son's name to your bank account or property does not automatically mean they are entitled to keep it after your death, or that its value will be excluded from the estate for probate purposes. If there is no clear evidence of an intention to gift, the child may be presumed to hold the asset as a bare trustee and its value may be included in the estate for Estate Administration Tax purposes.

A Gift to One Can Lead to Family Disputes

Many parents with several children will often add only one child to a bank account purely for the sake of convenience because that child lives nearby, helps pay bills, or assists with day-to-day finances. The parent may have every intention that all of their children will ultimately share the asset equally upon the parent’s death.

Time and time again, that intention is not clearly documented, and after the parent dies the child whose name appears on the account states the money belongs solely to them by right of survivorship. Other beneficiaries may argue that the account forms part of the estate and should be divided according to the Will.

What began as an attempt to save probate tax can quickly become a dispute over the inheritance, resulting in costly estate litigation.

Claims by the Child's Creditors

If a child is added as a joint owner of your home or bank account, that child’s ownership interest may become vulnerable to claims by the child’s creditors. If a child experiences financial difficulties, declares bankruptcy or is subject to a lawsuit, creditors may attempt to pursue the child’s interest in the jointly owned property.

Family Law Claims Arising from the Child's Separation or Divorce

If a child later separates from or divorces their spouse, the child’s interest in the jointly owned asset could become subject to the division of family property.

Breakdown of Relationship Between Parent and Child

Unfortunately, disagreements happen and relationships between parents and children can break down over time. If this happens after the child has been added as a joint owner of an asset, the parent may have lost exclusive control over the asset and may find it difficult to deal with or dispose of the asset without the child's consent.

Unintended Income Tax Consequences

Depending on the type of asset, there may also be income tax consequences of adding a child as a joint owner of an asset.

These risks vary depending on the type of asset and the family's circumstances.

Although probate tax is an important consideration when planning your estate, it should not be a driving factor and must be weighed against the overall estate plan. A well-designed estate plan balances many objectives, including protecting assets, minimizing taxes where appropriate, reducing the likelihood of family conflict, and ensuring that a person's wishes are carried out efficiently.

For some families, joint ownership may be an appropriate planning strategy. For others, alternatives such as carefully drafted Wills, multiple Wills, beneficiary designations, or trust planning may provide a more effective solution while avoiding unnecessary risk.

If you are considering strategies to reduce Estate Administration Tax or have questions about your estate plan, obtaining legal advice before transferring ownership of your assets can save your family significant time, expense, and uncertainty in the future.

 

The foregoing should not be considered to be legal advice and should not be relied upon as such. Please consult a lawyer to get advice and an opinion on your unique circumstances.