Friday, May 18, 2007

The Relevance of Who Paid the Taxes in Joint Account Disputes

In Pecore v. Pecore, 2007 SCC 17, Paula Pecore's father transferred investments into joint accounts with her. After he learned that the transfer might trigger capital gains taxes on the investments, Paula Pecore's father wrote to the financial institutions that he was “100 percent owner of the assets and the funds are not being gifted to Paula.” He continued to pay tax on the income from the joint accounts during his lifetime.

Yet, the Ontario Superior Court of Justice, the Ontario Court of Appeal, and the Supreme Court of Canada all found that Paula Pecore's father intended to make a gift to Paula. She was entitled to keep the balance of the accounts on her father's death as against his estate.

In contrast, in the companion case, Madsen Estate v. Sayor, 2007 SCC 18, the trial judge took into consideration the fact that the contributor to the joint accounts continued to treat the accounts as his own for tax purposes. The courts in that case held that the contributor's daughter had to return the funds in the joint account to her father's estate.

I find this aspect of the Pecore decision difficult. Mr. Justice Rothstein, for the majority, wrote that the trial courts could take who paid the taxes on the account into consideration, but the fact that the contributor continues to pay the taxes as though the accounts are solely his own is not determinative.

One of the things I find troubling about this case is that the father did not merely treat the accounts as his own for income tax purposes. He also wrote a letter clearly stating that he did not intend to make a gift to his daughter. Yet, the courts found a gift.

I also have difficulty understanding Mr. Justice Rothstein's analysis of the potential capital gains taxes arising on the transfer into a joint tenancy in light of his holding that the joint accounts are not testamentary. Mr. Justice Rothstein wrote that “...where 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 would appear to be no disposition at the moment of the setting up of the joint account....” In other words, the father could transfer the assets into a joint account without triggering capital gains tax as long as he retained beneficial interest (the use and enjoyment of the funds) during his lifetime.

But, as I wrote in my third part in this series, Mr. Justice Rothstein held that the joint accounts were not testamentary. They did not need to comply with the formalities of Wills legislation. This is because “...the rights of survivorship, both legal and equitable, vest when the joint account is opened....”

I have trouble reconciling the view that Paula Pecore received a beneficial interest in the right of survivorship the moment the joint accounts were created, with the notion that her father did not dispose of a beneficial interest in the accounts for tax purposes at the same time.

In the eighth part of this series, I will discuss what I consider the appropriate role of lawyers in advising clients about joint accounts.

My previous in this series were as follows:

In my first post, I summarized the facts of these cases.
In my second post, I wrote about the presumptions of resulting trusts and of advancement.
In my third post, I wrote about how the Court dealt with the issue of whether a gift of a right-of-survivorship is testamentary, requiring compliance with wills legislation.
In my fourth post, I wrote about the Supreme Court of Canada has relaxed the rule against evidence of statement and acts after a transfer has occurred.
In my fifth post, I wrote about the joint account documents.
In my sixth post, I wrote about the relevance of whether the contributor of the joint account continued to use and control the account during his lifetime.
In my seventh post, I wrote about the significance of whether the contributor also appointed the other account holder as an attorney under a power of attorney.

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