Holding assets jointly with kids
Adding a child’s name to a non-registered investment account seems to be a common, albeit unnecessary, practice. Single seniors or widows often do this on their own or at the behest of their children.
One of the benefits is that children can then assist their parents, if they become unable to manage their own investments. However, a power of attorney document can accomplish the same thing as adding a child’s name to an account. And a power of attorney or a similar provincial estate document is necessary to deal other assets, including real estate and registered accounts. So, adding a child’s name to an account should be unnecessary and certainly isn’t a replacement to having a power of attorney.
Tax: Does joint ownership save on probate costs?
Another purported benefit is that joint ownership allows the account to avoid probate. Probate is the process of validating a will with the province to allow an executor to distribute an estate. Probate may take up to a few months after death, and it can have associated legal or government fees. Some provinces have no or nominal probate costs, while others have estate administration tax of up to 1.695% of the assets.
Joint ownership of assets between a parent and child may not avoid probate due to legal precedents, like the Supreme Court of Canada decision in Pecore v. Pecore. By default, there’s a presumption of resulting trust when a parent and an adult child own an asset jointly. It’s as if the child holds the asset or a portion thereof on behalf of the parent. And it may be that the asset should be subject to probate despite the parent and child owning the asset jointly with the right of survivorship. This means probate may not necessarily be avoided.
Does joint ownership save on income tax?
Owning a joint margin account with a child does not avoid the income tax payable at the time of the parent’s death, either. An account can only pass to a surviving spouse or common-law partner on a tax-deferred basis. When a child inherits an investment account or any other capital asset from a parent after the parent’s death, there’s a deemed disposition with capital gains tax payable. So, joint ownership with a child does not avoid income tax.
Some risks to be aware of
Finally, if your children are joint on your margin account, Chander, that gives them access to your money, whether you like it or not. And even if you trust them implicitly, what happens if they become incapacitated? The person acting as their power of attorney may contend that the joint account belongs to them as well. Whether they could do so successfully or not is another story, but it’s an example of how someone other than your children could suddenly be involved in your finances.
The same could be said if your child is sued or goes through a divorce. Joint ownership could expose your investments to your child’s legal issues.
In summary
You cannot name a beneficiary for a non-registered margin account, Chander. Adding a child’s name to the account should be approached with caution.