Many property owners have the misconception that a real estate purchase is a one-time thing, and that after you signed all the papers, it’s done.
Actually, there are 3 different ways of owning real estate, each one leading to a completely different result. Today, we will use the story of Cinderella by Grimm Brothers as a case study to show this.
Cinderella’s father has many assets, including a beautiful family home.
Unfortunately, Cinderella’s mom passed away in sickness. Several years later, her father married a stepmom, who have two children of her own.
After the stepmom married her dad, she consulted an experienced lawyer and learned about the 3 ways of owning real estate. Those choices can be made at the time of purchasing the home, or in this case, after the purchase, as long as the dad (as property owner) and stepmom (as the person being added onto the deed) both sign in agreement.
- Stepmom and Dad owns the property as joint tenants. After dad passes away, stepmom will become the only owner of property — she will own it 100%. Cinderella will not receive any part of the house.
- Stepmom and Dad owns the property as tenants in common – stepmom 50%, dad 50%. After dad passes, stepmom still only owns her 50%. Dad’s 50% gets passed down according to his Will or to Estate Law. If Dad wrote a Will giving everything to Cinderella, then she gets 50% of the property.
- Stepmom did not go on the deed, so the deed only has dad’s name on it. However, because stepmom married dad, and they live in the property on a daily basis, the property became their matrimonial home. After dad passes, stepmom can use Family Law to gain possession of the home. She can even register a declaration of matrimonial property onto the house, to ensure that she gets a part of property because she’s the spouse.
From those 3 choices, (a) joint tenants is the best choice for mom. She tried to convince dad to do this, but dad chose (b) tenants in common – 50/50 instead. Dad wants to ensure Cinderella can have a part of the property when he passes.
Misfortune befall again. Cinderella’s dad passed away during a shopping trip (this did not happen during the Grimm Brother’s version -but for the sake of case study, let’s assume he did pass). Dad wanted to do a Will for a long time, but never found the time for it.
So now, the estate would be passed down as if there’s no Will, meaning:
- Stepmom owns 50% of property;
- Dad owned 50% – according to probate without a Will：
- Stepmom receives the first $350,000 (called preferential share)；
- For the leftover amount, Stepmom and Cinderella (being dad’s only child) each receives 50%. Let’s say the property is worth $1 million, meaning dad’s half is $500,000. From this, stepmom receives $350,000. The rest $150,000 is eventually split between Cinderella and stepmom. They can either sell the property and split the cash, or they can update the deed to reflect this new ownership.
Although stepmom received most of the property, she’s still not happy. She wishes to receive all estate assets with her two daughters. She made an argument to the Court, stating the stepdaughters are also dad’s children, so they should receive a share too. However, the Court said that only children who are related to dad by blood or by adoption gets a portion of the estate, so the stepdaughters are not eligible.
Another matter is making stepmom angry. If the property was held in joint tenants, then she does not need Court approval to receive the estate, and also doesn’t need to pay the 1.5% estate administration taxes. But since the property was held as tenants in common, she had to pay this tax.
Fortune finally befell Cinderella. She went to the ball, fell in love, and married the Prince. After that, the Castle became their matrimonial home (let’s ignore any laws relating to Royalty for now, and jus treat the castle like any other house).
As Cinderella moved into the castle, she left her dad’s house. This means the Caste is now her matrimonial property and principal residence, and the dad’s house became her investment property.
(The rest is not part of Grimm’s Brother’s story but made up to continue our case study).
After a few years, stepmom wants to sell the house. Since the house is stepmom’s principal residence, she is not taxed on the sale proceeds. But as the house is Cinderella’s investment property, Cinderella must pay capital gains on the sale proceeds.
Cinderella learned from her past experiences and insisted that she be added as joint tenant to the castle. The prince agreed. Cinderella and the Prince lived very happily and gave birth to a beautiful daughter. Tragically, the Prince passed away during a hunting trip.
As Cinderella owned the Castle as joint tenants with the Prince, all she needed to do was go to a real estate lawyer and update the deed. She is now the only owner of the Castle. She did not need to get Court Approval and did not need to pay probate taxes.
After everything that happened, Cinderella completed her Will immediately, stating:
- All of her assets, including the Castle, shall pass down to her daughter;
- The assets her daughter receives from the Will shall not become her matrimonial property; this means if the daughter gets a divorce, those assets will not belong to the spouse;
- The Will has a specific bond clause, stating that the Court should not ask her daughter to buy bond insurance (which can cost 5% of the entire estate) when applying for Court Approval to receive the Castle.
But there is an exception to the protection offered by (b). If her daughter decided to use the castle as a matrimonial home – meaning she lives in there with her spouse on a daily basis, then her spouse may still have a claim for the Castle when they get a divorce.
To overcome this problem, Cinderella could encourage her daughter and son-in-law to purchase their own property and to live in there. That way, their property is their matrimonial home, and the castle becomes the daughter’s investment property. This means according to the Will, it won’t be split upon a divorce.
But now there’s a problem with capital gains. As the Castle is the daughter’s investment property, when she sells it, there will be capital gains tax. A solution is that the daughter can sell the Castle in Cinderella’s name in the year that she passes.
Although Cinderella is no longer here, her daughter can sell the Castle under the Estate of Cinderella. As that’s Cinderella’s principal residence, there’s no taxes on the sale. And since there’s no inheritance taxes in Canada, the daughter can receive the sale proceeds tax-free.
Evidently, the 3 choices of how to own real estate may affect 3 generations of your family. Making the right decision from beginning to end is crucial.
This blog offers general legal information, not specific legal advice that may fit your situation. If you have specific questions, we welcome you to book a 1st free consultation here: https://calendly.com/sabrina-668/1stfreeconsultchinese
