A Simple Solution to Avoid Probate?
“Probate” is a court application to confirm the validity of a Will. It is an increasingly complex process, and requires payment of a probate tax. For many couples, probate can be avoided on the first spouse’s death by joint ownership. Not surprisingly, after the first spouse dies, the family may assume that joint ownership with the children is appropriate to avoid probate. This may or may not be the case.
Subject to certain requirements, private companies can sell shares to friends and family and “accredited investors” without issuing a prospectus or hiring a registered securities dealer. These exemptions have been amended to require that companies take “reasonable steps” to confirm that investors meet the requirements of the exemption. Companies may no longer simply rely on the representations of the investor. In addition, accredited investors must sign a new Risk Acknowledgment Form.
Property Transfer Tax is a provincial tax on the transfer of real estate. It is payable at 1% of the first $200,000 of the fair market value, and 2% on the amount over $200,000. The 2003 provincial budget included changes to the First Time Home Buyers’ Program, which provides a tax exemption from Property Transfer Tax for individuals buying their first home. Buyers who meet the following conditions will be eligible for the exemption.
– must be a Canadian citizen or permanent resident who has:
– lived in BC for one full year prior to the purchase, or
– filed two income tax returns as a BC resident within the last six years.
If the buyer is not a Canadian citizen or permanent resident at closing, but becomes one within one year of closing, the buyer can apply for a refund of the tax.
– must have never owned an interest in a principal residence anywhere in the world at any time.
– must occupy the property as their principal residence within 92 days of the date the property is registered in the buyer’s name, and must continue to reside in the property for the first year of ownership. If the buyer moves out prior to the one year anniversary, some or all of the tax may have to be re-paid
If the property is vacant land, the buyer must build and move into the home within one year of the date the property is registered in the buyer’s name, and must continue to reside in the property for the first year of ownership.
– value must not exceed $475,000. A proportional exemption is available for properties that have a value of up to $25,000 above this threshold (ie. up to $500,000).
– in the case of vacant land, the value of the land plus the total construction costs must not exceed the amounts stated above.
– must be classified as residential. If some of the buildings on the property are not classified as residential, only a partial exemption is available.
– must not exceed 0.5 hectares (1.24 acres) in size. If it does, a partial exemption is available.
If you have any questions about the First Time Home Buyers’ Program, please call us.
Is it the right choice for you?
Jane was retiring! To prepare, she attended a retirement seminar and noted she’d need a new Will. She’d heard about Beacon Law’s Estate Planning Navigator program, so she made an appointment to see her lawyer, Lianne. She’d ensured she’d be looked after in her old age, and would provide for her beneficiaries when she passed on, but during the Navigator review, Lianne and Jane noticed one more thing that it would be wise to look into….
Estate planning means different things to different people, but most people agree that some of the goals of estate planning include:
- Simplifying the administration of an estate
- Minimizing probate fees
- Ensuring that property passes to the intended person
One of the most common strategies used to achieve these goals is to own property with another person in a joint tenancy.
Joint tenancy or tenancy in common
Property owned by more than one person must be owned in one of two ways: joint tenancy or tenancy in common. In practical terms, the chief distinction between joint tenancy and tenancy in common is the right of survivorship. Only joint tenants can enjoy right of survivorship.
If you own property with another person as tenants in common, on your death your interest in the property becomes part of your estate to be passed on according to your will. If you own property with another person as joint tenants, on your death your interest in the property normally passes to remaining joint tenant(s) by right of survivorship, and does not form part of your estate.
In British Columbia, the law presumes that an asset (other than land) held in two or more names is owned as a joint tenancy, unless there is an indication that the owners own it in shares. So, for example, household goods, vehicles, bank accounts and investments owned by two or more persons will be presumed to be owned by them as joint tenants, unless their respective shares of the assets are specified or there is a statement that the asset is held by the owners as tenants in common.
However, in the case of land the common law presumption of joint tenancy has been altered by statute, so that land owned by two or more persons is presumed to be owned by them as tenants in common unless the title expressly states that they are joint tenants.
Right of Survivorship
Because of the right of survivorship, a joint tenancy can meet the estate planning goals of simplifying the administration of an estate, minimizing probate fees and ensuring that property passes to the intended person. It is a strategy used by the majority of married couples, who own their major assets, such as their home, as joint tenants.
The right of survivorship ensures that when the first spouse dies, these assets pass to the surviving spouse without being subject to the delays and expense of an application for probate (with a little extra planning, it is often possible to avoid probate altogether on the death of the first spouse). The right of survivorship also ensures that ownership of the assets will not be affected by claims under the Wills Variation Act, if there is a will, or by the rules for intestate distribution under the Estate Administration Act, if there is no will.
Beware of the Consequences
While joint tenancy is most common between spouses, it is becoming increasingly common between parents and children. The purpose is the same – to simplify administration of the parents’ estates and to minimize probate fees. Often the joint tenancy is created after the death of one of the parents. However, this can result in some unintended and undesirable consequences. Consider the example of a parent who has transferred her assets into a joint tenancy with one of her adult children:
Loss of control
The parent cannot later cancel the transfer if she changes her mind. As well, in the case of land, she will not be able to sell or mortgage the land unless the child also signs.
The transfer is a disposition for income tax purposes. The 50% interest in the property transferred to the child is deemed to have been sold at its fair market value and, unless the asset is the parent’s principal residence, a portion of any capital gains will be added to the parent’s income. This could result in the parent having to pay tax even though she received no payment from the child.
In addition, one half of any future capital gains will accrue to the child. If the property is the parent’s principal residence and the child lives elsewhere, the principal residence exemption will be lost for the child’s share of any future increase in value of the home.
Property transfer tax
In the case of land, property transfer tax will be payable at the time of transfer, although there may be an exemption available if the property is the principal residence of either the parent or the child.
Exposure to creditors
The child’s interest in the property will be subject to claims by the child’s creditors. If the child is married and the property is used for a family purpose, it could be subject to claims by the child’s spouse if there is a breakdown of the child’s marriage.
The child may pass away before the parent, negating the purpose of the joint tenancy. If other children were also on title with the parent as joint tenants, on the death of the parent the asset would pass only to the surviving children, and the family of the deceased child would receive nothing.
Another unintended result can occur if spouses in a second marriage own property together as joint tenants, and each have children from previous relationships. On the death of the first spouse, the property will pass by right of survivorship to the surviving spouse. The spouses may have had wills that provided that the property would ultimately pass to the children of both spouses, on the death of the last of them. However, the surviving spouse can change his or her will so that the property goes only to that spouse’s children, and the children of the deceased spouse would receive nothing.
The law presumes that a joint tenant who contributed nothing toward the property holds his or her interest in trust for the contributing owner. An exception is the presumption of advancement (meaning a gift in advance of a person’s death). According to case law, the presumption of advancement applies to transfers of property from one spouse to both spouses, or from a parent to a minor child.
However, in 2007 the Supreme Court of Canada stated (in the Pecore and Madsen decisions) that the presumption of advancement does not apply to transfers between parents and adult children. An adult child who receives an asset by right of survivorship from a deceased parent can no longer rely on the presumption that the deceased wanted the child to take the asset at death. Additional evidence is required to prove that the transfer into joint tenancy was intended to be a gift and that the surviving child was intended to receive the asset on the death of the parent.
The Pecore and Madsen decisions also raised the possibility that the right of survivorship itself could be gifted from one person to another. This presents several unanswered questions, however, such as the tax implications of such a gift. As well, it is not clear whether the gift of the right of survivorship applies to real estate.
Put it in Writing
To avoid the possibility of a dispute with other family members, and to clarify the tax consequences, it is now imperative to put the parent’s intention into writing. If the transfer to joint tenancy would not result in capital gains tax, or the parent is prepared to pay the tax, the parent could sign a deed of gift to confirm that beneficial ownership in the property is transferred to the parent and child as joint tenants with right of survivorship. On the parent’s death, it would be difficult for other beneficiaries to argue that the child holds the property in trust for the parent’s estate.
Alternatively, the parent could require the child to sign a declaration of trust confirming that the child does not have beneficial ownership in the property, but simply holds his or her interest in trust for the parent. In addition to reducing the possibility of a dispute between the child and the other beneficiaries of the parent’s estate, the declaration provides the parent with a greater amount of control over the property, and may prevent the deemed disposition of the property for income tax purposes (because beneficial ownership of the property remains with the parent).
However, Canada Revenue Agency (“CRA”) has suggested that the existence of a declaration of trust will not, in and by itself, be conclusive evidence that beneficial ownership of the property has not changed. It would depend on all of the circumstances.
CRA’s position is that if legal title to an asset is transferred from a parent to the parent and a child, but beneficial ownership remains with the parent (as confirmed by the declaration of trust and other circumstances), a disposition for income tax purposes has not occurred. Having said that, CRA pointed out that in such a situation a true joint tenancy with the child would not exist and, in its opinion, the goal of reducing probate fees would not be achieved because the property would not pass to the child by right of survivorship.
Joint tenancy can be an effective part of an estate plan, but must be used with caution. If you have questions about creating a joint tenancy or other estate planning strategies, call us first for professional advice.
For a discussion of other strategies to avoid probate and probate fees, click here.
B.C.’s Builders Lien Act came into force on February 1, 1998. It updated and in some cases significantly changed the law under the former Builders Lien Act.
Overview of the Act
The objectives of the Builders Lien Act are to ensure that construction funds are used for their intended purpose, and to protect those who add value to a building under construction. To fulfill its objectives, the Act uses three main strategies:
1) The Act provides a form of security to contractors, subcontractors, workers and suppliers who work on a building that is under construction – the builders lien. A builders lien is a charge on property by a person who has supplied work or material to a building under construction. A builders lien may be claimed by a contractor, subcontractor or worker. These are all defined terms under the Act and may also include architects, engineers and suppliers of materials.
2) The Act creates a pool of money out of which claims may be paid, by requiring an owner to hold back 10% of each payment to the contractor – the builders lien holdback. The builders lien holdback provides two functions:
- It ensures that there is a pool of money out of which builders lien claims can be paid (although it does not guarantee payment of those claims).
- It limits an owner’s liability for lien claims. If an owner complies with the holdback provisions of the Act, his or her maximum liability for lien claims will be limited to the amount of the 10% holdback or the unpaid balance of the contract price, whichever is greater.
3) The Act helps to ensure that money intended to finance construction is used for that purpose by imposing a trust on money received by contractors and subcontractors in connection with the construction project – the statutory or deemed trust. Contractors and subcontractors are deemed to be trustees of the money received by them. The persons engaged directly by them are the beneficiaries of the particular trust fund.
Time Limits for Filing Liens and Releasing the Holdback
The Act creates a multiple holdback system, requiring a 10% holdback on each contract and each subcontract. Trades that complete their work early no longer have to wait for completion of the entire project for release of their holdback. Their lien filing period, however, is also shortened.
The deadline for filing builders liens was extended from 31 to 45 days. The time for retaining the holdback was extended from 40 to 55 days.
These time periods begin on the date a payment certifier issues a certificate of completion for a contract or subcontract. A payment certifier is a person identified in the contract or subcontract, such as an architect or engineer. If there is no such person, it is the owner alone for each contract, and the owner and contractor together for each subcontract.
If a certificate of completion has not been issued, the lien filing and holdback periods begin on the date the head contract has been substantially completed, abandoned or terminated or, if there is no head contract, on the date the improvement has been substantially completed or abandoned. The Act includes provisions that define when a contract or improvement has been completed or abandoned.
A certificate of completion will not extend the lien filing and holdback periods if time has already started to run under the previous paragraph.
For strata lots, the Strata Property Act prohibits the filing of a lien after 45 days from the date of purchase, and extends the time for retaining the holdback to 55 days after the purchase.
Obviously, the provisions for determining when the lien filing period and holdback period has expired are complex, and when in doubt legal advice should be obtained.
The Holdback Account
The owner is required to pay the 10% builders lien holdback into an account at a bank or credit union. If the owner fails to do this, the contractor can stop working and sue the owner for damages arising from the work stoppage. The Act requires that the owner and contractor administer the holdback account jointly, so any withdrawals will require the signature of both the owner and the contractor. The holdback account will be treated like a trust account. If the owner acts as the contractor, a separate holdback account will be required for every contract with the owner.
The requirement that the 10% lien holdback be paid into an actual account is a new requirement not found in the previous Act. There are two exceptions. The first is where the total value of work and materials is less than $100,000 (e.g. renovations and small projects). The second is where the owner has a construction mortgage with a “savings institution ” and authorizes the savings institution to disburse the mortgage money. In that case the lender must hold back 10% of the mortgage money from each mortgage draw, and the lender will be liable to the owner and any lien holders if it fails to fulfill its obligations in relation to the holdback.
In the past, lenders held back 10% of each mortgage draw. In most cases, lenders now advance 100% of each draw, but want to ensure that the owner pays 10% into the holdback account.
Protection for Non-Contracting Owners
Owners such as landlords who have not contracted for the work being performed on their property may now file a Notice of Interest at the Land Title Office to protect themselves from lien claims. The notice warns that the owner’s interest in the land is not subject to lien claims unless the work was done at the express request of the owner.
Priority of Mortgage Advances
Advances under a mortgage made after the filing of a claim of lien do not have priority over the claim of lien. However, the Act eliminates the problem created under a previous court case which made it impossible for a lender to advance funds to complete a project under foreclosure when liens were filed. The lender may now apply to the court for an order that subsequent advances will have priority over filed lien claims. If the court is satisfied that the advances will be applied to complete the improvement and will result in an increased value of the land and improvement at least equal to the amount of the proposed advances, the court “must” make the order.
Requests for Information
Under the Act, a lien holder and certain other parties may request information from the mortgage lender, including the terms of the mortgage and particulars of the advances made. The lender must comply within 10 days after receiving the request.
The Act contains several other changes, including a shorter limitation period for breach of trust claims, methods of applying to court to cancel lien claims, changes to the 21-day notice to lien claimants to enforce their lien, and rules on where to start legal proceedings to enforce a lien claim.
Bob & Mary Buy Their First House
Bob and Mary had been married six years when Bob’s 35th birthday proved to be a milestone in their life together. Their daughter was two years old and both were progressing as software engineers. (They’d met at a conference in Hong Kong where Bob had been working.) Now they were about to buy their ﬁrst house. Some anxiety about the home purchase did arise, but Beacon Law Centre’s Kelvin Scheuer helped to deal with that.
Steve McKenzie, Retired Retailer
Now an elderly widower, Steve McKenzie once owned and managed a popular downtown department store in a small city on the mainland. This father of three has accomplished much for his family. After his wife of 52 years passed on, he bought a house on the south island with his youngest daughter, Julie, and he husband Ian.
One of the most exciting decisions we make involves the purchase of a new home. While the experience can be exhilarating, finding the perfect home can be challenging even for a sophisticated buyer. We find a home we like, but often with a few small problems. For example, the landscaping is not quite finished, or there is a large pile of rubble that should be removed from the yard. Do we go ahead, or not?
To induce a buyer to sign a Contract of Purchase and Sale, a seller may be prepared to take care of minor problems with the property. A clause will be added to the Contract of Purchase and Sale indicating that before the completion date (the day the Buyer must pay the purchase price), the seller will correct the problem. In this situation, the buyer needs to beware of his or her legal rights or responsibilities if the seller does not fulfill the promise.
The standard form of Contract of Purchase and Sale provides that there are no promises or agreements other than those written in the Contract of Purchase and Sale, but that those promises and agreements that are written in the Contract of Purchase and Sale will survive the completion of the sale. In the case of a seller who breaks a promise to fix something, the second part of this clause is helpful for a buyer. The clause means the seller is legally bound to correct the problem even after the completion date. If the seller does not, the buyer can sue for damages in Small Claims Court or, if the loss exceeds $25,000, in Supreme Court. But court proceedings are time consuming, slow, and costly. Even if the buyer gets a judgment against the seller, it may be difficult to recover the money.
To avoid the need to take a seller to court, buyers should have their realtor include a clause in the Contract of Purchase and Sale that allows the buyer:
- to inspect the property before the completion date to make sure that the problem has been corrected, and
- to hold back an amount equal to the cost to fix the problem if the seller has not fixed it by the completion date.
A buyer is generally not entitled to cancel the Contract of Purchase of Sale if a seller breaks a promise to correct a problem and, unless the Contract contains such a remedy, a buyer cannot demand that the purchase price be reduced, or that a sum of money be held back from the seller.
If you are buying or selling real estate and have questions about your contract, give us a call.