Title Planning 101: what to know before you buy
The dramatic price increases in B.C. real estate over the past couple of years has affected people’s Estate planning and triggered more discussion of what to do with titles to properties they own.
What we’re facing
In my opinion, there is still a lot of uncertainty stemming from how owners view title and ownership of property, because they are not the same. A person may be a registered owner on title to a property, but that does not indicate full ownership.
I’ll start with a couple of points to clarify.
First, what a title to any property tells you is, most important, the name(s) of the owner(s) of the legal title. They may or may not have paid to acquire it. They may have been added to the title. The title is then some evidence of ownership of the property.
The other type of ownership of property is called “beneficial” ownership. It is not always indicated by the identity of the registered owner.
A “beneficial” owner of property owns a legal interest in the property but not title. Such an owner has most likely contributed to the property in some way, such that they have acquired an interest in the property.
The concept of beneficial ownership can be confusing, especially if a beneficial owner is not the registered owner shown on title.
Legal and Tax
There are two considerations that people need to take in every title plan.
The first are the legal ramifications of any particular title registration. For example, a couple in a marriage-like relationship who buy a property and register title in both their names as joint tenants need to know that, if one of them dies, the other will take full legal title by right of survivorship (and maybe the beneficial ownership as well).
They may or may not want that, especially if the relationship is a subsequent one and each person has children from prior relationships.
The second consideration are the tax ramifications of any particular registration.
For example, if a married couple choose to add a child as a registered owner on title, to avoid the property falling into their Estate when they pass, they need to know there is a risk that the child (assuming the child does not live on the property) will incur a capital gain when the property is later sold.
In my opinion, the most important thing to know in title planning is that every purchase should be planned. It is true that many purchases are straightforward.
I expect, for example, that most married couples register their principal residence in both names, as joint tenants. But that will not necessarily apply every time.
If one of the members of the couple is a professional who is at risk, from their work, of being liable in negligence claims (for example, Engineers or Lawyers), registering title only in the name of the non-professional person might be appropriate.
In addition, if the property being purchased is a non-residential property (such as a revenue property or a lakeside cottage), it may or may not be appropriate to register title in both names or even in a company name (such as in a family holding company).
Again, it has to be discussed and that is best done at the time of purchase.
Avoiding Probate fees
This remains a significant topic for many families in their Estate planning. The intention is to avoid having a property fall into a person’s Estate when they die.
The reduction in the Estate value and subsequent reduction in probate fees (currently at 1.4% in B.C.) is attractive. But there is risk, and it arises in transferring a title to someone who does not live on the property and/or who does not pay anything for the interest they get.
Legally, there is no great problem in the title transfer. Legal title is typically transferred fairly easily and in the effort to avoid Probate fees, a joint tenancy is established with the person being added, or the property is gifted to another person (usually a child).
But without proper documentation, a transfer of the title may not include a transfer of the beneficial interest of the person.
In my opinion, CRA views transfers to non-spouses as dispositions. The person receiving the registered interest is deemed to receive it at fair market value, though they usually pay nothing for it.
If they sell the property, say, after the transferring person passes away, the capital gain to the person who was added on to title can be as high as the full sale price of the property (because their cost is $0).
Again, some steps need to be discussed and taken at the time of the contemplated transfer.
In my opinion, the capital gain tax cost (half the gain is taxed as income) is usually far higher than the amount of the Probate fee being saved. Having a higher-valued Estate is not “the end of the world,” and may be cheaper than engaging in a dispute with CRA.
Title planning has become an integral part of Estate planning. As values of real estate in the Lower Mainland have risen dramatically in the last 20 years, so have the risks involved in any title planning.
It should be said that if a couple owns a property (whether residential or otherwise), if possible they should register title in both names. That way, if one person passes away, any capital gain is deferred until the other person does.
Having said that, where any two or more people buy a property, there should be a discussion with their advisor(s), before the purchase closes, about how title should be registered.
Buyers should know the risks involved in any specific title registration, immediately and into the future.
If it is later decided to change the title, this also requires a lot of discussion, with not only a Lawyer but also (in my view) an Accountant, so that any tax implications are known and taken into consideration.
This ad ran in the Richmond News on May 27, 2016.