Q: If a cottage is purchased and held in joint tenancy with five other people, when is capital gains tax due? As each person dies or not until the cottage is sold?
A: In a joint tenancy arrangement, each of the tenants owns an unrestricted portion of the property. Each of the individual tenants may keep or sell their portion of the property during their lifetime.
Joint tenancy also comes with a right of survival. The means that when one of the joint tenants dies, their portion of the property passes automatically to the other surviving tenants.
In this case, for example, the six original tenants each own one one-sixth of the property. After the first of the joint tenants dies, that owner’s one-sixth portion will be redistributed evenly amongst the other survivors so after the death, each of the survivors will own one-fifth of the property, jointly with all the other remaining joint tenants.
There are no immediate tax consequences to the survivors, other than an adjustment to the cost base of the property, which is increased by the Fair Market Value of the newly acquired portion of the property. This should be noted by everyone in their tax records.
The joint tenants will each be required to report a capital gain or loss in the year there is an actual or deemed disposition of their individual portions of the property.
When one of the tenants dies, their executor must calculate the deemed disposition of the property and report this as a capital gain or loss on the final tax return. The ACB (Adjusted Cost Base) of the property is the deceased’s portion of the original investment, plus his or her portion of any additional investments in improving the property, plus the value of any portions acquired when prior tenants died. Any resulting accrued gains (or losses) on the deceased’s portion of the property, up to the date of death would be reported on the deceased’s final return.
If the property qualifies as the deceased’s principal residence there may be additional tax consequences. Also, it is possible that the deceased may have unused capital losses from the past to offset any taxable capital gain. It’s therefore important to work with a tax specialist in setting up the cost base of the properties and, in particular, with the executors in the year of death.
Evelyn Jacks is president of Knowledge Bureau, which offers e-learning at knowledgebureau.com. Evelyn tweets @evelynjacks and blog at evelynjacks.com
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