Q: I have a non-registered investment account and I would like to know the best way to transfer it to my beneficiaries. How can I minimize income taxes and probate fees? Is joint ownership a good option?
Asked by D.S.
Generally speaking, I advise clients not to give up control of their assets any sooner than they have to. Although minimizing taxes and fees is important, don’t let that be the driving force in your estate plan. I generally don’t recommend adding a joint owner during your lifetime (other than a spouse), because that could then expose the account to the creditors of the new joint owner, which could include a child’s ex-spouse. When a person adds an adult child to an investment account for no consideration (meaning that they didn’t pay for their interest), the courts currently presume that the account still belongs 100% to the parent and the child isn’t a true joint owner.But that is a presumption only and the presumption has been rebutted in many cases, forcing the parent to share the account or property when that wasn’t their intent.
One of the other potential problems is a possible inequitable distribution of your estate. For example, if you add your 3 children as joint owners and one of them predeceases you, will their children receive the deceased child’s share? These are just some of the questions that can arise – my advice is to keep control of your assets and have them distributed equitably in a properly executed will. Although adding a joint owner might help you save probate fees, the probate fees across Canada are quite low (the highest fees are around 1.5%).
The other issue is the payment of income taxes, which is quite separate and apart from the payment of probate fees. Although you can potentially save probate fees by adding a joint owner to an account (which, as mentioned above, is often not recommended), the same doesn’t hold true for income taxes. In the case of non-registered investments, income taxes are calculated by subtracting the adjusted cost base from the fair market value of the investment at the time of transfer. So if your investments are worth $200,000 when you die (or transfer them) and you paid $50,000 for them, the capital gain would be $150,000. The taxable portion of that is 50%, or $75,000, multiplied by your marginal tax rate. Although you can “rollover” your investments to a surviving spouse or common-law partner, the same cannot be said when transferring the assets to the next generation, and there is generally no way to avoid this. You might be able to minimize the tax by transferring the asset now vs. later (assuming the gain will only grow over time, which isn’t always the case), but again, why would you give away your assets before you need to? In some cases, even adding a joint owner could trigger part of the capital gain when you indicate that you want the child to become a true joint owner (for example, where you want to make an immediate gift of part of the account to your child and you sign documentation to that effect). In that case, if the unrealized taxable capital gain is $75,000, and you add 2 children on as joint owners, it is possible that you could trigger 2/3rds of the capital gain at that time (assuming there was 1 original owner, and there are now 3). If you sign a document indicating that you aren’t making your children true joint owners of the account, that may avoid having the capital gain triggered at the time they are added as joint owners, but all that means is that 100% of the gain will be triggered at the time of your death (again, assuming you don’t leave it to a spouse or common-law partner).
If you are concerned about the tax bite that the taxes on the capital gain may take out of your estate, then buying additional insurance is usually the most tax-effective strategy, since insurance proceeds are paid out tax-free at the time of death. Having a well-drafted will is also highly recommended.