It must have seemed like a good idea at the time, when adult children were brought on as joint owners of their parents’ banking and investment accounts.
Now, not so much. Joint accounts held by aged parents and their kids may qualify as a trust relationship, notably a bare trust, and thus be subject to complex new reporting requirements from the Canada Revenue Agency to verify exactly who owns what. A suggestion for families struggling to comply with the new reporting rules: Use a power of attorney to help aged parents manage their finances, not joint accounts.
Reporting a trust to the CRA means filling out a complex form called a T3 Trust Income Tax and Information Return and a T3 Schedule 15. In the case of joint banking or investment accounts, the reporting would be done by an adult child listed as joint accountholder with a parent. The filing deadline is April 2, but the CRA says it will waive late-filing penalties this year because people are still getting up to speed on the new rules.
Kavina Nagrani, an estates and trusts lawyer who is chair of the Ontario Bar Association elder law section, says families have used joint accounts both to help aged parents with their finances and to bypass the probate tax and legal process when their parents die.
Joint accounts are often set up without a full understanding of the implications, says Ms. Nagrani, a partner at NIKA Law LLP in Mississauga. She says children are often surprised to learn that not all jointly held assets actually bypass the probate process or avoid the tax when a parent dies.
While joint accounts may be convenient, the legal and CRA compliance implications can outweigh the expected benefits. “A big pet peeve of estate lawyers is that this is why powers of attorney were created,” Ms. Nagrani said.
A power of attorney (PoA) for property gives a child or another individual carte blanche access and authority over your assets. PoAs for property and personal care are usually drawn up alongside a will.
Ms. Nagrani said a key advantage of a PoA is that you are acting as a decision-maker or agent for the true owner without having your name on the title of an asset such as a bank account. In her view, using a PoA would not likely constitute a trust, and thus the CRA reporting requirements would not apply.
If a client were to ask her about putting a child on title to their accounts and assets, Ms. Nagrani said she would ask their intentions. If the move is about convenience and assistance, she would encourage the use of a PoA. For probate planning, she said there are other options.
In a practical sense, joint accounts seem attractive because they’re easy to set up. Bank websites say you just need to come into a branch with your co-owner, who requires valid ID. Getting a bank to accept a PoA and give you account access could be more difficult.
The Canadian Bankers Association says banks will generally accept a valid PoA, but there are cases in which the PoA would not be acted upon – for example, if the attorney asks the bank to change ownership of the account.
To ensure you have access to a parent’s account through a PoA, take it to a bank or investment company before you actually need to step in to manage the assets. Something to remember with PoAs is that financial companies are concerned about being sued and will not accept PoAs if there is any doubt about them.
Royal Bank of Canada says the documentation it would require in most cases to review a PoA includes
- the PoA, or a certified true copy;
- a form of medical documentation related to the account holder, if that person is incapable of managing their financial affairs;
- government-issued identification for the attorney.
If a POA is approved and an attorney is acting on banking matters, this person would receive an RBC client card. The card would be issued in the name of the donor or the person authorizing the attorney to act on their behalf, while also including a special identifier indicating “PoA” on the card.
One final thought on PoAs versus joint accounts: While joint account holders may make decisions in their own best interest, someone acting as a substitute decision-maker under a PoA must do what’s best for you.
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Rob Carrick