Before we transfer: Why you need a tax opinion before adding someone to your land title

Adding a family member to your home title might seem like a simple step. You want your adult child on the property maybe to avoid probate, maybe to make things easier down the road.

You call your lawyer, and you expect it to be done within the week. Here is what I tell every client before we proceed: talk to your accountant first. That is not me passing the buck. I do not provide tax advice because I am not an accountant, and I know my limits. That is not me adding to your costs either. I know the goal is to keep expenses down.

Advising you to talk with a tax professional about your upcoming transaction is me protecting you from a tax bill or notifying you of a lurking tax bill you did not see coming.

The transfer you did not know was a deemed disposition

"It's not a sale." That is often the first thing clients say. But under the Income Tax Act, the mere act of changing who is on title - even as a gift - can trigger a deemed disposition. A sale is not required. The same applies on death.

In the eyes of the Canada Revenue Agency, you have transferred something of taxable value. That transfer of land may trigger a capital gain in the year it happens, which will show up on your tax return the following year.

I can prepare and register the transfer documents. That is my job. But whether the transfer creates a taxable event, and how significant that tax exposure might be, is a question for a qualified tax professional, which is an accountant who can look at your specific financial picture and give you a proper opinion before the transfer triggers anything. Accountants often give specific directions on what to include in the transfer to help minimize or defer the tax bill, after they conduct their tax analysis of your portfolio.

"But It's My Principal Residence" The most common scenario I see is a parent wanting to add an adult child to the title of the family home.

The parent assumes that because it is their principal residence, the Principal Residence Exemption (PRE) will shelter any gain and there is nothing to worry about. Sometimes that is correct. Often, the situation is more complicated than it appears.

The PRE allows a homeowner to shelter capital gains on the sale or disposition of a property designated as their principal residence. But the exemption can only be claimed on one property per family unit per year. And eligibility depends on a number of factors, including what else is on title, and whose name is on it.

Here is an example of how quickly things can unravel: A client wants to add their adult child to the parent's home. We begin working through the transaction and I ask a routine question: does the adult child own any other property? It turns out the parent is already on the adult child's title. Perhaps they co-signed a mortgage years ago to help their child buy a condo, and their name was never removed. Now we have two properties, and two people who may each need to claim the PRE on different homes.

The PRE exemption cannot shelter both simultaneously. Depending on how the designation history falls, the transfer of an interest in the family home could trigger a taxable gain that the exemption does not fully cover. This is not a rare case. It comes up regularly in my practice. And it is exactly the kind of thing a tax professional will identify in a proper review before the transfer is registered, when there is still time to do something about it.

What about probate? Is that not the point?

Many clients want to add an adult child to title specifically to avoid probate. It is worth knowing that in Alberta, probate registry fees are nominal. The Court of King's Bench charges a maximum of $525 depending on estate size. With the right estate plan and an estate lawyer to guide the administration, probate is often a straightforward process. Trading that for an unexpected tax bill is rarely the goal.

Avoiding probate fees alone is generally not a compelling reason to undertake a title transfer that could have significant tax consequences. Read more here.

Beyond the tax risk, adding someone to title also brings other considerations: the child's interest in the property may become exposed to their creditors or a future relationship breakdown, and the parent may lose some control over their own home. A tax professional - and a candid conversation with your estate lawyer - can help you weigh whether a title transfer is actually the right tool for your goal, or whether there is a better approach.

What the tax and legal professionals will look at

When I refer a client to their accountant before we proceed, here is the kind of analysis we are looking for:

• Adjusted Cost Base (ACB). What did you originally pay for the property, and what have you spent on capital improvements over the years? The difference between your ACB and the current fair market value is your potential capital gain on a disposition.

• Principal residence designation history. Has the property been designated as your principal residence for every year you have owned it? Were there any years where a different property was designated? Has the property ever been used for rental income?

• The other party's situation. Does the person being added to title own other real property? Could their own PRE be needed elsewhere? What does their tax situation look like?

• Timing. Are there reasons to complete the transfer in a particular tax year? Are there other transactions - sales, purchases, inheritances - that impact the analysis?

• Alternative structures. Is adding someone to title even the right tool for what you are trying to accomplish? Sometimes a trust, a right of survivorship co-ownership arrangement, or a carefully drafted Will achieves the same goal without triggering an immediate disposition.

  
  

My role and theirs

I want to be direct: I am not trying to slow you down or add unnecessary steps to your file. I am trying to make sure that when we do the transfer, you have had a chance to understand the full picture.

An accountant cannot give you legal advice. I cannot give you tax advice. That is not a gap. It is the professional division of labour working exactly as it should.

Land transfers are among the most financially significant transactions most people make, and the legal work is only one piece of it. The tax implications are another piece.

When a client comes to me wanting to add someone to title, my standard practice is to ask questions and flag the potential tax exposure, and ask them to get a tax opinion before I proceed. Once they have had that conversation with their accountant and understand what they are agreeing to, we move forward together.

That is what careful estate planning looks like: a team of professionals making sure nothing falls through the cracks for you, or surprises you with taxes owing.

A note on timing

Tax planning works best before a transaction, not after.

Once a transfer is registered at the Land Titles Office, the disposition has occurred. There is very little a tax and legal professional can do at that point except help you report it correctly and attempt to retroactively plan - and both require more of our billable time.

If you are considering adding a family member to your property title, start your due diligence by reaching out to your accountant first. Then call me.

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The content of this article is for general information only and does not constitute legal or tax advice. Please consult a qualified professional regarding your specific circumstances.