Ask a Planner
By Jason Heath, CFP on February 12, 2024
Estimated reading time: 5 minutes
By Jason Heath, CFP on February 12, 2024
Estimated reading time: 5 minutes
Jointly owning an asset with a child comes with tax and estate implications. Here’s why it may not be the best tax solution.
How is tax treated by CRA in a joint brokerage account with my son (not spouse). Is it the same as with a spouse?
All funds are mine, and I moved them to a new brokerage account, but now included my son’s name. The reason being, as I am getting older, this move is to make my estate planning more convenient.
I understand that I still declare all my dividends, capital gains and losses 100% and no splitting income.
—Jing
Before I delve into the answer for your question, Jing, I will do a little primer on income attribution rules.
When you give cash or assets to a family member to invest, there may be attribution of that income back to you. Attribution causes income to be taxed on the original taxpayer’s income tax return. Attribution applies:
Attribution does not apply between a parent and an adult child, unless the funds are loaned to the adult child at a low interest rate or at no interest rate. In the case of a low- or no-interest loan, where it seems the intention is not to truly gift the money, but to reduce tax payable on the income for a period of time, there is attribution. As with a minor child, it applies to interest and dividends, but not capital gains.
When an asset is outright gifted to a child, there’s a deemed disposition. The asset is considered to be sold to the child at the fair market value, and any accrued capital gains become taxable. So, you cannot avoid tax by gifting an asset, like a cottage, for one dollar, for example.
It does not appear you have made a gift to your son, Jing. You intend to continue to report the income. So, there is no capital gain and there is no attribution. You should just continue to report the income on your tax return.
This is a case where legal ownership—whose name is on an asset—does not match the beneficial ownership—who technically owns the asset. Legally, the account is joint. Beneficially, the account belongs to you.
This creates tax consequences for you that may be unintended. Trust rules have changed for 2023 and future tax years. If you have an account, like your brokerage account, Jing, where the legal and beneficial ownership are different, you need to file a special tax return.
A T3 Trust Income Tax and Information Return is used by trusts to report trust income as well as information about the settlor, trustees and beneficiaries of the trust. Although you may not have established a trust with a lawyer, or even consider this joint account to be a trust, the Canada Revenue Agency (CRA) considers it a trust.
The CRA makes an exception for “trusts that hold less than $50,000 in assets throughout the taxation year (provided that the holdings are confined to deposits, government debt obligations and listed securities).”
It bears mentioning, Jing, that a deemed disposition occurs when you die. So, the fair market value of the investments on your date of death are reported as the sale proceeds. This triggers capital gains and tax payable.
I come across people who think they can avoid capital gains tax by adding their children’s names to an asset. That is not true.
Another point worth mentioning relates to probate or estate administration tax. Seek legal advice in your province or territory of residence, Jing. If you live in Ontario, for example, the Ontario Ministry of Finance Estate Information Guide for calculating estate administration tax (probate) states: “Remember to include all property in which the deceased had a beneficial interest, even if the deceased did not hold legal title and legal title was held in another person’s name.”
Joint ownership of assets with a child is a common strategy to avoid probate in Canada, but it may not work. It also exposes your assets to your son, Jing. You may not worry about elder financial abuse because you trust your son, but even if you trust him implicitly, there may be situations beyond his control that put your assets at risk.
What happens if your son becomes disabled? The person named as his power of attorney may suddenly become involved with your finances. What if he gets divorced or is sued for a car accident and there’s a claim made on the account? Your son’s situation later in life may add complexities to your own finances.
The point I’m trying to make here is that here are risks to jointly owning assets with a child. There may be no tax savings and no estate benefit and, in fact, there may be increased tax filings and associated costs.
In this instance, Jing, your son could help with the account and your other assets just as easily as your power of attorney. This would give him a higher fiduciary responsibility. And you could name a replacement if your son cannot act due to disability, death or otherwise declining health.
Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email
Your email address will not be published. Required fields are marked *
Δ
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Mort Laitner
Rami G Khouri
Donald Low
Ali Fathollah-Nejad
Nikkei Editorial
visit website
