Legal Blog

Sever (2)

In our June 2012 newsletter, we discussed how a joint tenancy could be severed. The usual way is for one party to deal with that party’s share (e.g. selling or encumbering it). However, even if the joint tenancy is severed, sometimes the actual result of the severance is not apparent.

A joint tenancy can be created by way of a transfer from an owner to the owner and another as joint tenants. Often, an owner decides to do this to avoid probate tax – with the understanding that the owner has full control over, and all monetary benefits of, the transferred property until the owner’s death. This is a dangerous game. Execution creditors of the new joint tenant can be waiting in the wings and pounce. The owner can have a change of mind. The new joint tenant can start to assert ownership rights. The exact nature of a joint tenancy and a severance under these circumstances was discussed in Nigel v. Rosenberg, a 2024 Ontario Court of Appeal decision.

Transfer

A property owner had no family of his own and wanted to leave his house on his death to the great-niece of the owner’s deceased partner. Although his 2005 will would have already accomplished this, the owner wanted to avoid payment of probate taxes. In 2012, the owner therefore transferred the house into the name of himself and the niece as joint tenants. The niece paid nothing.

After the transfer, the owner continued to pay for the upkeep of the house and lived in it. The niece never contributed financially to the house, nor did she ever live there.

In August 2020, the niece and her spouse visited the owner. While the niece was out of the room, her spouse told the owner that he and the niece intended to renovate the house and sell it. They would then use the proceeds to purchase a new property in which the owner could live with them. This was the niece’s first mistake.

This proposal shocked the owner. He was afraid that the niece and her spouse would take steps to force him out of his house and he wanted to retain full ownership of it. Within a month, he transferred his interest in the house to himself as a tenant in common with the niece. This severed the joint tenancy. He reasoned that, by doing this, if he died before he regained ownership of the house, the niece would not get the entire house.

Application

As part of his plan to regain full ownership, the owner brought an application for the house to be put into his name only. There was only one question: when the owner transferred the house to himself and the niece as joint tenants for no consideration, did this create a resulting trust in the owner’s favour or was the transfer intended as a gift to the niece?

The owner argued that the niece had not rebutted the presumption of a resulting trust for the 2012 transfer. He testified that he never intended the niece to have any rights over his house until his death and that the lawyer who prepared the 2012 transfer never advised him about any rights that the niece might have over the house as a joint tenant.

The niece argued that the owner had made an unconditional gift to her and, accordingly, the niece was a beneficial owner of a joint interest in the house. She maintained that the severance of the joint tenancy in 2020 was ineffective because, she argued, a gift cannot be revoked.

Application Hearing

The application judge decided that, by means of the 2012 transfer, the owner intended to gift the right of survivorship to the niece but did not intend to gift the property to the niece during the owner’s lifetime. The judge held that the owner never intended to give the niece any control over the house before the owner’s death. The judge noted that, in law, there could be a gift of the right of survivorship in the absence of an intent to give the property to the transferee during the transferor’s lifetime and that, although the gift is immediate, it is a gift only of what would remain at the time of the transferor’s death.

The judge therefore concluded that because of the 2012 transfer:

• The niece held her interest in the house during the owner’s lifetime in trust for the owner.
• The niece held a right of survivorship, entitling her to the entire equity of the house, if any remained, upon the owner’s death.
• The owner retained the right to sell or encumber the house.
• The gift of the right of survivorship took effect immediately and, even though a gift cannot be revoked, it did not preclude the owner from severing the joint tenancy, thereby eliminating the right of survivorship.

The judge concluded, regarding the 2020 transfer, that:

• The transfer severed the joint tenancy, making each of the owner and the niece a tenant in common with a 50% interest in the house.
• Based on the presumption of resulting trust, the niece held her 50% interest in trust for the owner.
• Although the severance of the joint tenancy eliminated the niece’s right of survivorship regarding the owner’s 50% share, the owner could not revoke the right of survivorship with respect to the niece’s 50% share. Accordingly, on the owner’s death, his 50% share of whatever equity remained in the house would form part of his estate and the niece’s 50% share of whatever equity remained in the property would pass to her in accordance with the intention of the 2012 transfer.

The niece then made her second mistake; she appealed. The owner supported the application judge’s decision but argued that the entire right of survivorship ended with the severance of the joint tenancy.

Appeal

The niece argued that the application judge erred in his conclusion regarding the effect of the 2012 transfer. This got short shrift with the Court of Appeal. It held that the judge’s findings were entitled to appellate deference and that there was ample evidence to support the judge’s finding that the owner did not intend to gift the niece any rights concerning the house that she could exercise during his lifetime. The niece had argued that putting an interest in the name of the niece exposed her to capital gains taxes if the house were sold during the owner’s lifetime and that the owner would not have created that exposure unless he intended to gift her a current beneficial interest in the house as well as the right of survivorship. The court noted that there was no evidence that the owner ever considered capital gains exposure and, in determining whether a gift is intended, it is the intention of the transferor alone that counts.

The court agreed that a gift rebuts the presumption of a resulting trust. However, in the case of property transferred gratuitously from an owner into joint names, demonstrating that a gift was intended solely as to what remains of the property upon the death of the transferor, only partially rebuts the presumption. The result is a gift only of the right of survivorship, without any rights exercisable during the transferor’s lifetime

The court held that there was no reason to distinguish between joint tenancies created for consideration and those created gratuitously. Any joint tenant has the unilateral right to sever a joint tenancy at any time.

Result

The court agreed with everything that the application judge said about the 2020 transfer except his final conclusion (3^rd bullet point). The court reasoned that, after the 2012 transfer, the niece held her interest in the joint tenancy in trust for the owner but the niece had a right of survivorship. After the 2020 transfer severed the joint tenancy, the niece continued to hold an interest in a tenancy in common in trust for the owner. No right of survivorship attached to that interest. This meant that, on the owner’s death, the niece would get nothing. She had no right of survivorship and her 50% interest would be held in trust for the owner’s estate.

Sometimes, an appeal is not a strategically good decision.

 

Image courtesy of alyoshine.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.