Thinking About “Just Adding a Name” to Your Title? Think Again.
In today’s real estate market it is becoming more common for relatives to add their names onto the title of a house to help the real owner — typically a child or parent — qualify for a mortgage. Many others look to add a relative to avoid estate administration taxes when the owner dies.
What does it legally mean to add someone’s name to the title to your property?
In Ontario you have to file an electronic Land Transfer form with 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. See my earlier blog “What’s on Your Title” for information on the different ways you could hold title.
Before transferring an interest in your property to someone else, you should consider the legal, tax and other ramifications.
Capital Gains Tax
Capital gains tax is a federal tax which is triggered when a property is sold and a capital gain is realized. Generally, a capital gain is an increase in the value of the capital (i.e. your property) from its original price (i.e. the adjusted cost base (“ACB”)). Fifty percent (50%) of the capital gain is taxed at the person’s marginal tax rate and 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.
A principal residence is one of the few assets that is exempted from Capital Gains tax. However, in most cases, the individual being added to title will not be able to claim the house as their principal residence, so there will usually be income tax consequences. Once an individual is listed as a joint owner on a property that is not their residence, he or she becomes legally liable to pay capital gains tax when the home is sold.
Creditors and Loans
Once a person becomes a joint owner, they acquire an interest in the property, therefore the equity in the home becomes susceptible to that person’s creditors. This can be a particularly problematic issue if the individual goes through a divorce. The individual’s spouse could demand to be paid some of the equity in the property during the divorce.
Property is an asset and banks routinely use property as collateral for loans. When you add another individual as a joint owner on your residence, the individual could now attempt to use the property as collateral for a new loan. If that happens when you want to sell the property, proceeds from the sale of the home could end up going towards repaying the loan first.
As a joint owner, the individual can prevent you from selling the property. You cannot fully dispose of a property unless all the owners agree to the sale and sign the Land Transfer form. Additionally, the proceeds from the sale of your home are not available to your beneficiaries. As stated in my earlier blog post, when you list someone as a “joint tenant”, then on your death, the property does not go through to your estate, but rather passes to the other person. As a result, your intended beneficiaries will not inherit any interest in the property.
If you do not notify your insurance company of the change in title, your home insurance policy will likely become void (as the insurer will consider that title transfer as a change in the insurable risk). Unfortunately, this is often something you only find out about when you make a large claim on your policy.
Moral of the Story
Just “adding a name” to the title of your property has real legal, tax and other consequences.
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.