When they were little, you held their toy cars and dolls for safekeeping. As they got older, you may have held their jackets, diplomas, and first-ever lease agreements. Now, if you are a parent to a millennial, you may find yourself holding the title to their home – a smart way to give your child a hand as they enter the housing market and access a mortgage for the first time.
But just like their toy cars, fall jackets, or new tenant agreements, you likely don’t want to hold title to their property forever. For your generosity, the CRA offers a tax break: if you want to transfer full ownership of a home into your child’s name, you may be able to avoid capital gains taxes.
It’s like a graduation gift, only you get to share in the benefits with your child.
Who owns what?
Parents who have helped their children buy homes often retain what is known as “legal ownership”, either in full or in part, of the home their child inhabits. This happens most often when a parent has a property registered in their name with their child for a mortgage approval, while the recipient child lives in, and covers most or all of the related payments. The parents do not live in this home.
In this scenario, the child will retain full “beneficial ownership” of the home by using and maintaining the property, while sharing “legal ownership” with the parent.
While capital gains taxes are typically triggered by a sale or transfer of land, your child’s status as a beneficial owner means that if you eventually choose to take your name off of title to their home, perhaps when the mortgage renews or is paid in full, Canada Revenue Agency does not consider this a taxable event.
Joint assets
While this may seem like a new perk in a difficult housing market, it aligns with the tax interpretation letter 2013-0511771E5 E as well as the common law of joint asset ownership: in Pecore v Pecore, where a father had listed his daughter as a joint owner on his bank account for the purposes of managing his funds, the court ensured that there was a distinction made between the owner who contributed funds to and used the account, and the owner who was appointed to manage the account.
This means that when the father passed away, his bank account became part of his estate, rather than going to his daughter. This is because the court protected his ability to benefit from his daughter’s help without the financial consequence of surrendering the account to his daughter at the expense of his son, who was not listed on the account.
In a similar way, the CRA protects a parent’s ability to help a child purchase a property and qualify for a mortgage without the risk of consequences such as capital gains down the line.
Peace of Mind, and Money
So, for families who wish to stick together when a child is in need, joint principal residence ownership is not only possible, but can come with no (tax) strings attached!
*This article is not intended to be legal advice and should not be relied on as such. It is important to carefully consider property ownership implications as small changes to the facts can lead to a different tax outcome. If you would like to consider the implications of adding your children or parents’ names to your assets, consult an Estate Planning Practitioner.
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