The article “Joint tenancy vs tenancy in common in Canada: Changing ownership of assets for married and common-law partners” was originally published in MoneySense on October 14, 2021. Photo by cottonbro from Pexels.

The tax implications of changing land owned jointly as tenants in common to joint tenancy with right of survivorship and how to do it.

My common-law partner and I purchased a vacant lot last year, and we registered it as tenants in common. We are starting to build a home on the lot this year and we would like to change it to joint tenancy. Would you be able to explain how we would go about doing this? — Sheila

What’s the difference between tenants in common and joint tenancy?

Tenancy in common is a type of joint ownership often used by common-law spouses, couples in second marriages, or family or friends who own real estate together. Tenants in common can own different percentages of a property, and they own a divided interest or share of a property, rather than jointly owning the entire property together.

Joint tenancy with right of survivorship is commonly used by married couples to own real estate, whereby spouses simultaneously own 100% of a property. When a joint tenant dies, their ownership interest passes directly to the survivor—the so-called right of survivorship—who then owns the whole property.

The death of a property owner who owns a share of real estate as a tenant in common will cause the share to pass through their estate and be dealt with, based on the terms of their will. It may be left to someone other than the other co-owner, like children from a first marriage, for example. If a property is owned as tenants in common and your estate wish is to have it go to the co-owner, as may be the case for you, Sheila, owning as joint tenants with right of survivorship may be advisable.

Spouses who separate or divorce may do the opposite—changing ownership from joint tenants with right of survivorship to tenants in common.

A real estate lawyer can help change the ownership of real estate, Sheila. There will be legal fees to do so and may be municipal or provincial fees as well. The costs may be up to a couple thousand dollars.

The tax implications in changing tenants in common and joint tenancy

When you change ownership of real estate, there may be land transfer tax payable, but typically only when consideration (cash, other assets, a loan, etc.) is being paid for the transfer. If co-owners change ownership and no consideration is exchanged, like changing from tenants in common to joint tenants, there will typically be no land transfer tax implications.

If you both own 50% of the lot, and you change the ownership to joint tenants with right of survivorship, there should be no income tax implications either, Sheila. If you own a different percentage than 50% prior to changing the ownership, there may be income tax implications.

When spouses transfer capital assets like real estate between each other, the transfer typically takes places at cost, unless you elect otherwise. That means any potential capital gains tax is deferred until sale. Future income—whether capital gains or rental income—could be attributed back to the spouse who transferred some of their ownership to the other spouse.

As an example, if you owned 75% of a rental property and transferred 25% to your spouse, so you each owned 50%, the rental income and eventual capital gain on sale should likely still be reported 75% by you rather than equally on your tax returns.

If the property qualifies as your principal residence, as I suspect is the case for you, Sheila, there may be no income tax implications whatsoever. If in doubt, seek tax advice from a professional.

Once you change the ownership of the lot, Sheila, if either you or your partner dies, the ownership of the lot and any buildings on it will transfer to the survivor. It will not pass through your estate. So, the terms of your will do not apply to it. The property will become part of your estate on the second of your two deaths and be distributed to the beneficiaries of your will at that time.

Generally speaking, all of this commentary would apply to both legally married and common-law spouses.

Other advantages and disadvantages to know about

There may be other implications for you to consider, Sheila. If you are building a home, there may be sales tax (Good and Services Tax or Harmonized Sales Tax) that may be payable upon completion but may qualify for federal or provincial rebates.

There may also be family law implications if you and your partner later separate, and one of you contributed more to the purchase of the lot than the other. Also consider if one of you will contribute more than the other to the home construction. As a result, you may need additional sales tax or family law advice.

While it is relatively easy to have a real-estate lawyer change the ownership of the lot, there are a lot of other things to consider here as well, Sheila.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.