This article intends to analyze how to determine the actual intention of the ageing parent who opens a joint bank account with his or her child in Ontario by summarizing the Supreme Court of Canada’s decision on Pecore v. Pecore, 2007 SCC 17. These types of joint accounts are used by many Canadians for a variety of purposes, including estate-planning and financial management. As joint bank accounts are widely used among the family members in Canada, the courts are often requested to determine the intention of the parent who opens the joint bank account in order to decide who has legal right for the balance remaining in the account at the date of death of the parent. The common question is whether the parent intended to make a gift of the beneficial interest in the accounts upon his or her death to the child who holds the joint account or whether the parent intended that this child holds the assets in the accounts in trust for the benefit of his or her estate to be distributed according to the will.
Factual Background
Paula has two siblings. Among the three children, Paula was the closest to the Father. Unlike the other siblings who were financially independent and secure, Paula worked at various low-paying jobs and took care of her quadriplegic husband Michael.
Father had been helping Paula and her family by buying them a van, making improvements to their home, and assisting Paula’s son while he was attending university.
In 1993, Father was told by a financial advisor that by placing his assets in joint ownership, he could avoid paying probate fees and taxes and that the joint ownership could make after-death disposition less expensive and less cumbersome.
In 1994, Father began transferring some of his assets to some bank accounts or mutual funds jointly owned by Paula and himself.
In 1996, Father was advised by his accountant that transfers to his daughter (as opposed to his spouse) could trigger a capital gain and that the tax on the gain would be due as of the year of disposition. As a result, Father wrote letters to the financial institutions purporting to deal with the tax implications. One of the letters stated that he was the 100% owner of the assets and the funds were not gifted to Paula. Until Father’s death, Father continued to use and control the accounts.
In early 1998, Father drafted a will. By this time, he had already transferred the bulk of his assets into the joint accounts with Paula. Father named Michael in his will. However, the will did not mention those accounts. The lawyer who drafted the will testified that there was no discussion about the joint investment and bank accounts.
In around June 1998, Father moved into Paula and Michael’s house. In 1997 and 1998, the father had expressed to others, including one of Paula’s sisters, that he was going to take care of Paula after his death.
In December 1998, Father passed away. Shortly before his death, Father was estranged from one of Paula’s sisters. His estate paid tax on the basis of a deemed disposition of the accounts to Paula immediately before his death.
Main Issue to Analyse
What evidence may courts consider in determining the intent of a transferor?
Court’s Analysis
1. The Supreme Court decision reminds us that the rights of survivorship, both legal and equitable, vest when the joint account is opened and the gift of those rights is therefore inter vivos in nature even if the beneficial interest of the transferee appears to arise only on the death of the transferor.
2. However, where a gratuitous transfer is being challenged, the trial judge would be required to determine the actual intention of the transferor to determine whether the presumption of the gift of the rights of survivorship could be rebutted. The evidence to be considered would depend on the facts of each case. However, the Supreme Court’s decision analyzes some types of evidence in the present case and its companion case (Para. 55 of Pecore v. Pecore, 2007 SCC 17).
1) Evidence Subsequent to the Transfer
In principle, the evidence adduced to show the intention of the transferor at the time of the transfer “ought to be contemporaneous, or nearly so”, to the transaction. However, the evidence of intention that arises subsequent to a transfer should not automatically be excluded. In fact, the subsequent declarations are admissible as evidence against the party who made them (para. 56 & para. 59 Pecore v. Pecore, 2007 SCC 17).
2) Bank Documents
The Supreme Court held that bank documents that set up a joint account indicating the agreement between the account holders and the bank could provide strong evidence of the intentions of the transferor regarding how the balance in the account should be treated on his or her death. Therefore, the courts should not be barred from considering the bank documents which specifically suggests the transferor’s intent regarding the beneficial interest in the account (para. 61 Pecore v. Pecore, 2007 SCC 17)
In the present case, Father’s writing to the bank saying that the transfers were not gifts to Paula was considered to reflect Father’s intention “to avoid triggering an immediate deemed disposition of the assets in question, and therefore avoid capital gains taxes” (para. 74 Pecore v. Pecore, 2007 SCC 17).
3) Control and Use of the Funds in the Account
The Supreme Court held that the court could evaluate the control and use of the funds in the joint account in the ascertainment of the transferor’s intention. For example, if the transferor does not have retention of her exclusive beneficial interest in the account in her lifetime, she may actually intend to gift the right of survivorship to the transferee.
However, evidence of use and control may be of marginal assistance only because: 1) Ageing parents may set up accounts for the sole purpose of having their adult child manage their funds for parents’ benefit; 2) Sometimes, although the adult child, the transferee is entitled both legally and beneficially to withdraw funds, could refrain from accessing them in order to ensure there are sufficient funds to care for the parent’s life; 3) While control could be consistent with an intention to retain ownership, it is also not inconsistent in this case with an intention to gift the assets.
4) Granting of Power of Attorney
If the transferor has already been advised about the distinction between granting the power of attorney to merely manage accounts and gifting the right of survivorship and avoiding probate fees by creating a joint account, the court would have discretion to consider the granting of power of attorney when deciding the transferor’s intention. However, this evidence will not be determinative.
5) Tax Treatment of Joint Accounts
The trial judge has discretion of determine a transferor’s intent by considering who actually has been declaring and paying the income tax on the money in the joint accounts. Some judge relied in part on the fact that the transferor was the one who declared and paid tax on the money in the joint account in finding that the transferor has no intention to gift the joint account to the transferee. In the present case, the trial judge noted that Father continued to pay taxes on the income in joint accounts but nevertheless found that Father intended to gift the joint accounts to Paula.
The Supreme Court noted that whether or not a transferor continues to pay taxes on the income earned in the joint accounts during his or her lifetime should not be determinative of his or her intention in the absence of other evidence. For example, when the transferor intends to transfer full legal and equitable title to the assets in the account immediately and the value of the assets reflects a capital gain, taxes on capital gains may become payable by the transferee in the year the joint account is set up. However, when the transferor’s intention is to gift the right of survivorship to the transferee but retain beneficial ownership of the assets during his or her lifetime, there won’t be any disposition at the moment of opening the joint account.
6) The Will
In the present case, Father’s last will is also an important indicator of intention. Although the will was made in years subsequent to the transfer, the trial judge considered the lawyer’s testimony is reliable as the lawyer had nothing to gain from his testimony. The Will indicates that Father was of the view that the accounts had already been dealt with and understood these assets would not form part of the estate as the Will does not mention a word about the joint accounts (para. 73 Pecore v. Pecore, 2007 SCC 17).
Conclusion: Main Takeaways
1. This Supreme Court decision reminds us that in Ontario, the rights of survivorship vest when the joint account is opened and the gift of those rights is therefore inter vivos in nature even if the beneficial interest of the transferee appears to arise only on the death of the transferor.
2. While a gratuitous transfer is being challenged, the trial judge would determine the actual intention of the transferor to determine whether the presumption of the gift of the rights of survivorship could be rebutted. The evidence to be considered would depend on the facts of each case.
(Reminder: The purpose of this article is to provide general legal information. It does not contain a full analysis of the law nor does it constitute a legal advice on the points of law discussed. To minimize the legal risk for your business, you must take specific legal advice from a lawyer on any particular matter which concerns you. Thanks for your attention.)