How Joint Accounts Impact Taxes and Estate Planning

Ask MoneySense

I have a question about a joint margin account at a brokerage: what happens if one spouse dies? Does the surviving spouse keep the account in their own name, or can they add a son or daughter to the account?

—Chander

Joint accounts after death

This is a common and important question, Chander. The outcome for a joint margin account after one spouse dies depends on a mix of tax and estate rules and on who is listed as an account holder. Below I explain the typical tax treatment, the role of beneficiaries, alternatives such as powers of attorney, and the risks and myths surrounding adding children to accounts.

Joint account taxation when a spouse dies

When someone dies, the tax system generally treats their capital property as if it were sold at fair market value on the date of death — a so-called deemed disposition. That can create capital gains or losses that must be reported on the deceased’s final tax return. However, there is an important exception for transfers to a surviving spouse or common-law partner: many capital assets can pass to the surviving spouse on a tax-deferred basis. This deferral can apply to non-registered investments, including a joint margin account, so capital gains are not necessarily triggered at death when the surviving spouse is the other account holder.

In practice, assets that pass to a surviving spouse are usually transferred at the deceased’s adjusted cost base (ACB), effectively continuing the deceased’s original tax position. There is also an election that allows the transfer to be made at any value between ACB and fair market value. That election can be useful in some circumstances, for example if the deceased has low income, unused capital losses, or large credits in their final tax year and it would be advantageous to realize gains or losses on the final return.

Importantly, a joint non-registered margin account commonly transfers to the surviving spouse without formal probate in many provinces; the brokerage will typically require a copy of the death certificate and documentation to retitle the account. That avoids certain estate administration steps and fees, though details vary by institution and jurisdiction.

Beneficiary designations for accounts

Registered accounts such as RRSPs, RRIFs and TFSAs usually allow you to name a beneficiary directly with the financial institution. That designation can permit assets to pass directly to the named person on death, subject to plan rules and tax consequences.

By contrast, a non-registered account — like a typical margin account — cannot have a beneficiary designation in most provinces unless it is placed in a formal trust. Creating a trust requires a legal trust deed and entails ongoing legal and tax filing obligations, which is generally only practical for substantial estates. For most people, a trust is too costly and complex for routine use.

Holding assets jointly with children

Because non-registered accounts cannot typically have beneficiaries, some parents consider adding an adult child’s name to their non-registered accounts so the child can manage the holdings or to try to simplify transfers on death. While this practice is fairly common, it has important drawbacks and is often unnecessary.

One apparent benefit is that a child listed on the account can step in to manage investments without further legal documents. But the same capability is far better handled through a properly executed power of attorney for property, which grants a designated person the legal authority to manage financial affairs if the account owner becomes incapacitated. A power of attorney covers a much wider range of assets — such as real estate and registered plans — and avoids the risks of jointly titling accounts.

Does joint ownership save on probate costs?

Another common reason people add a child’s name is to try to avoid probate fees. Probate is the court process that validates a will and gives an executor the legal authority to distribute assets. Probate fees vary by province and can be significant in some jurisdictions.

However, joint ownership with an adult child may not prevent probate and can even create legal complications. Court decisions have established a presumption of a resulting trust when parents and adult children hold property jointly: the law may infer that the child holds the asset for the benefit of the parent rather than owning it outright. As a result, joint ownership does not guarantee that assets will escape probate, and courts have on occasion required such assets to be treated as part of the deceased estate.

Does joint ownership save on income tax?

Joint ownership with a child does not avoid income tax on a parent’s death. Tax-deferred treatment at death is typically reserved for transfers to a surviving spouse or common-law partner. When a child inherits an investment account on the death of a parent, the deceased is normally subject to the deemed disposition rules and any resulting capital gains must be reported on the final return. Therefore, adding a child to an account will not eliminate the capital gains tax that can arise at death.

Some risks to be aware of

Putting a child on your margin account gives that child legal access to the funds and investments while you are still alive. Even with the best intentions, this exposes the account to several risks. If the child becomes incapacitated, their own power of attorney or estate issues could complicate access to or control of the account. If the child faces a lawsuit, creditor claims, or marital breakdown, the jointly held assets could also be at risk.

There are also interpersonal risks. Disputes can arise among family members over access, withdrawals or the timing of transfers, and those conflicts can be difficult and expensive to resolve.

In summary

In short, you cannot name a beneficiary for a standard non-registered margin account in the same way you can for registered plans, and adding a child’s name to the account should be approached with caution. Joint ownership with a spouse typically allows tax-deferred transfer to the surviving spouse, but joint ownership with a child does not avoid capital gains tax at death and may not reliably avoid probate. It also exposes your investments to legal and personal risks.

For most people, the safer route is to keep accounts in the owner’s name, establish a valid power of attorney for property, and use a clear estate plan documented in a will. If you are considering alternatives such as trusts or joint ownership, consult a qualified estate lawyer and a tax advisor to understand the tax, legal and practical consequences before making changes.