# Capital gains question on mother's condo



## Four Pillars (Apr 5, 2009)

I'm going to be discussing this with my accountant soon, but I thought I'd see what you guys think.

My wife's mom recently sold her condo for a small net profit (I have to verify this) over her purchase price. When the mother-in-law bought it several years ago, she put my wife as a joint owner. The idea was to avoid probate fees if she died while still an owner.

Everyone gets free capital gains on their personal residence, but I'm concerned that the CRA might say that the condo was my wife's 'cap gain free' sale and if we ever sold our house - she would owe capital gains on it on her portion of our house.

I've seen a number of opinions that indicate that won't happen and as long as my wife didn't live there, she should be ok. She didn't contribute any money for the purchase or any maintenance or anything. She also didn't get any money from the sale.

Do you guys have any opinion on this?


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## andrewf (Mar 1, 2010)

Does putting someone else on the deed actually work for avoiding probate? Also, isn't probate a pretty minor cost (beside the much bigger concern of deemed disposition capital gains/RRSP unwinding at a high marginal rate?


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## AltaRed (Jun 8, 2009)

I have read about instances of CRA chasing joint owners down in situations like this, sometimes ending up in tax court*, but I have also been told it would be rare for CRA to, first of all, question this, and second of all, persist in pursuing it. Lastly, as a principal residence, your mother in law is not reporting the sale at all on any tax return, and since your wife is taking the position she does not have a beneficial interest in the property, she does not need to report it either. 

Estate professionals warn against seniors doing these sorts of things to avoid probate time and again. Too many people do this on investment accounts, bank accounts and real estate, making each party vulnerable to each other if a relationship deteriorates or one of the parties go 'rogue'. There was a column in the local rag just yesterday admonishing people on this very thing. The tax tail wagging the dog in these cases. Much of this advice appears to be coming out of bank branches which, if true, is self-serving for them.

* You may want to peruse the outcome of tax court cases yourself, or ask a friendly tax lawyer/accountant to do a screen for you on tax court outcomes of this nature.


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## OptsyEagle (Nov 29, 2009)

Other then the fact that your wife probably shouldn't be listed on the deed, since in a divorce you will get multiples more from her mother, then probate ever would, with this setup. That being said, I would just ignore it. Let your mother declare it as 100% principle residence and your own house would be the same. If anyone asks, just tell them that your wife was put on for estate purposes only and that will probably keep them away. I doubt anyone will ever ask, anyways.


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## MoneyGal (Apr 24, 2009)

andrewf said:


> Does putting someone else on the deed actually work for avoiding probate? Also, isn't probate a pretty minor cost (beside the much bigger concern of deemed disposition capital gains/RRSP unwinding at a high marginal rate?


FP: I'd ignore it, as others have suggested. 

Andrew: I actually wonder if this "fear of probate" is the result of too much American tv-watching, whereby people get "estate tax" somehow collapsed with probate. There's also a sales-y self-serving insurance aspect, as "avoidance of probate" is typically listed as a benefit (but never quantified) on insurance products.


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## Four Pillars (Apr 5, 2009)

Thanks for all the quick responses everyone. Looks like 'ignore' is a reasonable course of action. 



andrewf said:


> Does putting someone else on the deed actually work for avoiding probate? Also, isn't probate a pretty minor cost (beside the much bigger concern of deemed disposition capital gains/RRSP unwinding at a high marginal rate?


Yes, it does.

I think MoneyGal has it right with people thinking that probate costs are high because they are mixing up estate taxes in the US.

The other benefit of avoiding probate is that it makes it a lot easier and quicker to take over ownership of something (house or whatever). 

Not sure why you are mentioning RRSPs, but yes the potential tax bill from a house sale could easily be larger than the probate fee. However, it seems like this is a bit of a loophole which makes it a valid strategy. Both my real estate lawyer and my mother in law's real estate lawyer fully endorsed this move so I think it's pretty common.


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## andrewf (Mar 1, 2010)

I'm talking about end-of-life tax liabilities. If someone has substantial unrealized capital gains in non-registered accounts or RRSPs at time of death, then the tax bill from these would be much larger than probate, which is almost a rounding error.

I'm told my elderly grandparents bought a GMWB thingy because it avoids probate. My knee-jerk question is always: "isn't probate next to nothing?"

No one actually checks these things. Apparently my 50 year old uncles are using the same GMWB scheme, which seems just totally bizarre to me.


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## Four Pillars (Apr 5, 2009)

I see what you mean. Yes, it is silly to spend money to avoid probate fees.


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## MoneyGal (Apr 24, 2009)

andrewf said:


> I'm told my elderly grandparents bought a GMWB thingy because it avoids probate. My knee-jerk question is always: "isn't probate next to nothing?"
> 
> No one actually checks these things. Apparently my 50 year old uncles are using the same GMWB scheme, which seems just totally bizarre to me.


Q.E.D. (in respect of my last post)


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## OptsyEagle (Nov 29, 2009)

Four Pillars said:


> Both my real estate lawyer and my mother in law's real estate lawyer fully endorsed this move so I think it's pretty common.


Also, be careful getting advice from those that get paid to make the type of deed changes you discussed. I do hope they at least had the curtosy to discuss the issues surrounding the divorce of her daughter and what could legally have happened to her house, not to mention your bankruptcy, etc. 

I know I am discussing you in this example, but their advice was wrong, in all but a very few exceptions. That is my opinion, anyways.


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## Four Pillars (Apr 5, 2009)

OptsyEagle said:


> Also, be careful getting advice from those that get paid to make the type of deed changes you discussed. I do hope they at least had the curtosy to discuss the issues surrounding the divorce of her daughter and what could legally have happened to her house, not to mention your bankruptcy, etc.


There was no deed change. When my mother-in-law bought the property, she had my wife added to the title at the same time as the ownership was transferred. No extra cost was involved.

I wasn't there for the conversation, so I don't know about what was discussed.


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## OptsyEagle (Nov 29, 2009)

Not trying to harp on your case FP and I am sure it will all work out for the best.

I had a personal experience in this area that kind of biased me about this stuff. 

About 10 years ago a friend of mine was dating a girl who was divorced. She had been divorced for around a year and probably seperated longer then that. My friend was talking about them going on this extravagant trip and when asked about the cost he said that his girlfriend got a big winfall. Her ex-husband decided to gave her an additional settlement of $30,000. 

When asked why this guy would give her this extra cash, the answer eventually boiled down to this. Back in 1994 when the cap.gains exemption was being taken away, like many people at that time, his (ex-husband) parents decided to put their cottage into his name, to avoid probate and future capital gains taxes. Now I don't know how she reopened the divorce settlement negotiations, but in any event, she basically told him that if he didn't give her this money she was going to go after 1/2 of his parents cottage. Now these parents use this cottage all the time. He probably didn't even remember he owned it, since it basically is and always was, his parents. In any event, I assume, out of the embarassment of getting a divorce and it now affecting his parents, he agreed to this extortion and made this payment to his ex-wife.

I always wondered if his parents ever knew how much money it cost their son, to implement this particular tax strategy. Whether they ended up ahead or not isn't really the point. In my opinion, they should never have given him the cottage until they were ready to give him the cottage and live with all the positives and negatives that would go along with that.

Since then, I always suggest people think about all the possible side effects of joint-ownership, which can sometimes have far reaching implecations to all parties involved.


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## MoneyGal (Apr 24, 2009)

OE: this is an extremely valid point and a very useful post. Thanks for typing that out.


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