THINK TWICE before “just adding a name” to your title

1. What does it legally mean to add someone’s name to your title?

In BC you have to file an electronic FORM A land transfer at the Land Titles Office to add someone’s name to your property title.

However by doing so, you are doing more than just adding a name. You (“the transferor”) are legally transferring an interest in the property to the other person (“the transferee”). He or she will then be a co-owner of your property.

The transfer of interest could be anything from the whole fee simple to a half interest, quarter interest or something much smaller like a one per cent interest.

2. Does money have to change hands?

No. The land titles office will accept a $1.00 and other good and valuable consideration entry.

3. What are the ramifications of transferring an interest to someone else?

Apart from another person now owning part of your property there could also be tax consequences.

PROPERTY TRANSFER TAX (“PTT”)

In BC, there may be Property Transfer Tax (“PTT”) consequences. PTT is provincial tax payable on the fair market value of the interest in the property being transferred.

It is 1% on the first $200,000 and 2% on values over that amount and 3% on amounts over $2,000,000. If the transferee is a foreign national or a foreign corporation the PTT can jump by a further 15% in certain circumstances.

Unless there is an exemption (like the transfer of an interest in a principal residence)* PTT is payable regardless of whether any money changes hands.

So let’s say that you add your wife to the title of a rental property that is worth $600,000. If she acquires a half interest that will trigger PTT of $4,000 regardless of whether she paid full market value or $1.00.

*see s.14 Property Transfer Tax Act for a list of exemptions from this tax http://www.bclaws.ca/civix/document/id/complete/statreg/96378_01

CAPITAL GAINS TAX

Capital gains tax is a federal tax which is triggered when a property is transferred and a capital gain is made.

Generally, a capital gain is an increase in the value of capital (i.e. your property) from its original price (the adjusted cost base (“ACB”)).

Capital gains are taxable on 50% of the capital gain at the transferor’s marginal tax rate

Let’s assume in the previous example that the rental property was originally purchased for $300,000 and now has appreciated to $600,000. Transferring a half interest to the owner’s wife would trigger a $300,000 capital gain, half of which is taxable. If the transferor’s marginal tax rate was 50%, he would end up paying approximately $75,000 in tax for the privilege of adding his wife to the title.

Again, unless there is an exemption, capital gains tax is payable whether money changes hands or not based on the increase in value of the property.

4. Can’t you just remove the person’s name from title?

No. The transferee becomes the legal owner of the interest. He or she must agree to transfer it back to you and similarly execute an electronic FORM A land transfer.

That person will then incur the same tax ramifications as noted above.

5. Insurance

Unless you notify your insurance company of the change of title, your home insurance policy will likely become void (as the insurer will consider that title transfer as a change in the insurable risk). This is only something you will find out about when you make a large claim on your policy.

6. Avoiding Probate Fees

By adding your adult children to your title as joint tenants (meaning that all parties have equal interests and a right of survivorship), the owner can avoid BC probate taxes (which are euphemistically referred to as “fees”) of approximately 1.4% on the estate.

Assuming that the property is a principal residence (valued at $1M) and therefore not subject to capital gains or PTT, your estate would save $14,000 in probate fees upon your death by having the kids as joint tenants (plus legal fees to probate the estate).

However in the meantime, the kids are co-owners of the property who must consent to any sale or mortgage (and in fact, they will have to sign any new mortgage or mortgage renewal as well).

If your child gets married (or lives with someone continuously for 2 years in a marriage-like relationship) their spouse will acquire a 50% interest in (any increase) in the value of their share of the property under the Family Law Act (unless exempted by a marriage agreement). Thus, you could end up having to buy out an ex-spouse’s interest in your property if you wanted it back.

Lastly, if your child gets into financial hot water by virtue of a failed business venture, MVA (where he is underinsured), gambling debt or other, his share of the property can be encumbered by a judgment -again making it problematic to re-transfer if your plans change.

MORAL OF THE STORY

Just “adding a name” to your title has real legal, tax and other consequences.

Even transferring an interest in a “principal residence” (which can seem like a safe bet at least from a tax perspective) can result in PTT, capital gains and even business tax consequences in certain unusual circumstances.

That is why it is essential to obtain professional advice from your lawyer and accountant to ensure that transferring a part of your title makes both good business and legal sense AND that there are no unpleasant surprises after the fact.

Disclaimer:  The foregoing is for information purposes only and not intended as legal advice to the reader.  Always consult with an experienced real estate lawyer when modifying the standard real estate contract in use in BC. In addition statutory law as well as case law may change from time to time which could render this analysis inaccurate in the future. 

(C) 2017 Pazder Law Corporation