CAN I GIFT MONEY TO MY ADULT CHILDREN FOR DOWN PAYMENT TO PURCHASE A PROPERTY IN ONTARIO?
Rising real estate prices and strict mortgage rules have made securing a home loan and purchasing a house more difficult than ever, especially for homebuyers purchasing their first home . In an attempt to break into the housing market, younger generations are desperately turning to their parents for financial assistance in the form of gift money for home purchase or loaned down payments.
Recent statistics from the Ontario Real Estate Association (OREA) demonstrate that over 40% of parents to children ages 18 to 38 provided financial assistance to help finance the purchase of a home. The gifts and loans, on average, were $71,000 and $41,000 respectively. Some help even reached the six-figure range.
Other forms of financial support are also becoming more common. As parents are becoming more aware of the state of the current housing market and acknowledge that the affordability of housing will only worsen in the years to come, some help with their children’s monthly mortgage payments or are even transferring their entire property to their kids.
These are all becoming common scenarios. But what both the parents and children do not always realize is that there are legal implications to such gifts, loans, and title transfers. Let’s explore a few of these issues and find out how to minimize any financial or legal risks that may arise.
GIFTING MONEY TO CHILDREN BY A GIFT OR LOAN?
GIFTS VS LOANS? WHAT SHOULD I USE TO GIVE MONEY TO MY CHILDREN?
Gifts and loans are treated differently by the law. If financial support comes in the form of a loan, there is an expectation and legal requirement that it will be repaid. In contrast, a gift is a voluntary and irrevocable transfer of property or funds.
Prior to making the transfer to your child, make sure both of you understand each other’s expectations. If you offer your child a loan, you should sign a promissory note or loan agreement that outlines the terms of the repayment and any other conditions that fit your circumstances. Without such contracts, the loan may be deemed to be a gift that may not be returnable to you in the future.
WHAT IS A PROMISSORY NOTE?
A Promissory Note is a legal document that serves as evidence to prove that a lender has loaned money to a borrower. It is a contractual promise to repay the loan in accordance with the terms outlined in the document. Typically, a promissory note is used when the loan amount is not large and the parties to the agreement trust each other. In contrast, a Loan Agreement is a more formal document that also outlines the conditions for the repayment of a loan, however, this document is generally used when there is a significant amount of money involved.
In general, a promissory note will have terms relating to the identities of the parties involved, the amount of money borrowed, the date when the borrower must repay the loan, any interest rate, and the signatures of both the borrower and lender
You should be aware that the enforceability of promissory notes is governed by the Limitations Act in Ontario. Under this legislation, the lender will have only two years after the loan’s maturity date (i.e. date of repayment written in the promissory note) to collect repayment for the loan or to start a court proceeding. Otherwise, after two years the promissory note will lose its enforceability and you may not be able to return the loaned amount.
WHEN DO I NEED A PROMISSORY NOTE?
If you are lending your money, it is always advisable to have a lawyer prepare a promissory note to solidify the agreement. This legal document will ensure that you have evidence of having made the loan and will protect your right to reclaim the money later on.
If parents are at crossroads about whether to gift or lend money to their children as a down payment for purchasing a house, from a legal perspective, it is safer to create a promissory note instead of gifting the money outright.
Here are some examples of when it is appropriate to offer a Loan as opposed to a Gift of money:
- In the event your child gets a divorce, the gifted amount may be split between your child and their spouse.
- In the event your child dies, your child’s spouse will receive the entire amount if the money had been used to purchase a matrimonial home.
- Although you may not need this money now, your future situation may change. It is desirable to have a safety net for your retirement.
- Your relationship with your child may deteriorate and you may want your monies reimbursed.
FAMILY LAW IMPLICATIONS OF GIFTING MONEY TO CHILDREN
Although people hope that their love and commitment will last a lifetime, this does not always happen. As mentioned, your generous financial assistance for a home purchase may become an issue if your child ends up separating or divorcing from their spouse.
WHAT HAPPENS TO MY MONETARY GIFT IF MY CHILD SEPARATES FROM THE SPOUSE?
A Matrimonial Home is the main home in which spouses live. For legal purposes, this term is used to identify the property where a married couple lived in before their separation. The matrimonial home is a special asset that is treated differently from all other property and assets in the divorce process. The Canadian Divorce Act and the Ontario Family Law Act outline some laws that govern how the matrimonial home and the funds that were used to purchase a matrimonial home are treated upon the breakdown of a marriage.
Typically, when spouses go through a divorce, they calculate the value of their assets and divide them in a process called Equalization. However, there are exceptions to the assets that are added for the valuation. For example, gifts made to your child prior to their marriage are not included in the calculation of your child’s Net Family Property, thus they do not have to be split upon their divorce. However, if your gift prior to your child’s marriage is their matrimonial home, or your gifted funds had been used to purchase their matrimonial home, these funds will not be excluded from the calculation.
WHAT HAPPENS TO MY MONEY GIFT IF MY CHILD DIES?
As pointed out, gifts are irrevocable or permanent. Thus, if you gift an amount of money to your child and their spouse to purchase a home, your child’s spouse may be entitled to keep the sum in the event your child passes away. If you do not wish for this to occur, you should clearly state your intentions in a formal agreement.
This actually happened to one Ontario family. In Greco v. Frano, the parents sold their home and provided $90,000 to help finance the purchase of a property for their daughter and her husband. Unfortunately, the daughter passed away within the next few years, and the parents asked their son-in-law to return the money. The son-in-law refused to refund the amount, arguing that the money had been gifted to the couple.
The court ultimately dismissed the parent’s claim, stating that not only was the claim bared from enforcement due to the passing of the 2-year limitations period (i.e. 2 years after the parents initially gifted the money), the loan did not include any terms and there was no date for the repayment of the money. Thus, the amount was considered to be a gift.
This case shows the importance and value of a clearly established agreement and the need to have legal advice and a lawyer prepare such an important legal document.
HOW TO PROTECT THE MONETARY GIFT TO MY CHILDREN?
There are several steps you can take to ensure your money is protected. After all, it is essential to plan for the worst while still hoping for the best.
When offering money to your children for buying a home, it may be a good idea to offer a loan rather than a gift if you do not want your child’s spouse to benefit from this gift later on.
Under the Family Law Act in Ontario, a loan will reduce the net family property value for the equalization process of separating spouses which is beneficial to your child as they will not have to share your money gift with their spouse.
If you decide to offer a loan, you should have a lawyer prepare for you a loan agreement as the courts are more likely to treat a financial advance from a parent to a child as a gift rather than a loan without any evidence to contrary (Barber v Magee).
A Promissory Note or a Loan may also outline some unique terms of the agreement for your situation, such as the return of funds upon a marriage breakdown. At the end of the day, if you change your mind, you do not have to enforce the promissory note and may ultimately gift the advanced money to your child.
You may also enter into a Mortgage Agreement with your child and his/her spouse. If the spouse is not a part of the promissory note or loan, the spouse may not be held liable for the repayment of the loan in the event of a divorce.
If you want to gift the money, but you are still worried about your financial advance, your child can also enter into a Marriage Contract, such as a Prenuptial Agreement, with their spouse prior to marriage or prior to receiving the gift. This contract will allow your child and their spouse to decide in advance how to split their assets in case of a future divorce, including how to deal with their matrimonial home.
Seeking legal advice from an experienced Lawyer like Beffa Law is a necessary step to ensure your contracts are correctly drafted to meet your needs. A real estate lawyer can help you with any of your family law planning, promissory note drafting, and any real estate questions you may have.
TAX IMPLICATIONS OF MONETARY GIFTS TO CHILDREN
Can Parents Gift Money Tax-Free? Are there any Double Taxation risks?
While some parents only help with their child’s down payment, other parents occasionally offer to gift an entire home to their children.
Although Canada does not have a tax for gifts, some special gifts can trigger taxation rules. One such rule relates to real estate transfers. So, if you plan to gift or “sell” your property to your child for a nominal amount to outsmart the system and avoid real estate fees, you may not be able to achieve the outcome you’ve hoped for.
If parents gift property to their child for an amount that is less than the fair market value of the property, they may be liable for double taxation. This is how it works:
If you sell your property to your child for $5 but the fair market value of the property is actually $500,000, the law will assume that you earned a capital gain of $499,995, half of which is taxable. Furthermore, if your child sells the home at a later date for $600,000, the child will be deemed to have earned a profit of $599,995, half of which will also be taxable. Thus, you will face double taxation as there is a deemed disposition of the property at fair market value.
Thus, title transfers of property should be made for a fair market value.
ESTATE PLANNING IMPLICATIONS OF MONETARY GIFTS TO CHILDREN
CAN I LEAVE MY HOUSE TO MY CHILD THROUGH MY WILL?
One of the most common gifts left by parents to their children in a Last Will and Testament is real estate property. However, if the child’s name is not on the title of the property, the deceased’s estate will have to go through a process called Probate. To finalize this process, the estate must pay an Estate Administration Tax, which is calculated based on 1.5% of the total value of the estate, minus the first $50,000.
This may be a significant amount of money, especially if the value of the estate is large, like most estates in the Toronto area, Province of Ontario. However, there are ways to avoid this tax.
This may be a significant amount of money, especially if the value of the estate is large, like most estates in the Toronto area, Province of Ontario. However, there are ways to avoid this tax.
REAL ESTATE PASSING ON TO THE SURVIVING CHILD
Can I Add My Child to The Title/Deed Of My Property as a Joint Owner?
The law states that any assets that are held as joint tenants will be transferred by way of survivorship and passed directly to the surviving joint owner or owners of the asset. As such, adding your child’s name to the title for your property will allow them to become the owners of the property after your passing. This way, the property will circumvent the Probate process since it will pass outside the parent’s estate and will not be part of the assets that will be probated.
This strategy can be used regardless of whether or not the child financially contributed to the purchase or maintenance of the property.
However, the downside of this method is that both the parents’ and child’s names must be on the title of the property. This can sometimes become problematic if there are disputes on how to manage the property. If you believe such complications are likely to arise, this may not be the most desirable estate planning method for you.
To understand what is the best option for our unique situation, you should consult a Real Estate Lawyer and an Estate Lawyer like Beffa Law to learn more about Estate Planning and Title transfer.
HOW CAN A LAWYER HELP WITH MONEY GIFTS TO CHILDREN?
As you realize now, there is no right or wrong way to financially help your children purchase a property. The legal route you choose is based on your unique circumstances and future expectations.
However, there are legal steps you should take to protect your finances and estate as circumstances and people may change in the years to come.
While helping your children is a commendable deed that many parents pride themselves on, it is an excellent idea to retain a lawyer like Beffa Law to help ensure that your expectations are met and that you are not at risk of losing your hard-earned funds.
Beffa Law may be able to help you with the following:
- draft a Promissory Note or Loan Agreement with your desired terms.
- analyze your individual situation and offer the best option to deal with your Real Estate property like Title Transfer, Purchase, or Sale
- draft a Marriage Contract to secure property in case of a marriage breakdown.
- advise on an Estates plan to best avoid estate administration taxes in Probate.
- draft your Last Will and Testament.
- register a new Mortgage on your child’s property to secure your loan.
- Transfer Title for joint ownership.
Overall, if you are a parent who wants to help your child Buy a Property or a child whose parents are offering money to purchase your home, please contact us at Beffa Law. We will be able to help you choose the best method to handle your funds and real estate purchase, draft loan agreements in order to protect your money, and advise you on the steps you should take to minimize your risks.
If you require any assistance with your real estate transaction or estate planning get in touch with us at Beffa Law and we will be able to help you navigate through the rough waters of the real estate world and achieve the results your desire. Beffa Law is a real estate law firm serving Oakville, Burlington, Milton, Mississauga, and other areas west of the GTA. We offer assistance in buying, selling, refinancing along with other practice areas. Call us at 647-812-8462 or email us at info@beffalaw.ca to set up an appointment to discuss your estate questions or concerns.
