While real estate prices are hitting never-before-seen highs, young buyers are having trouble saving up the down payment required. Parents who want to help them have several ways to help their offspring get on the property ladder.
Of course, you can make a cash gift, which is a concrete way to give them as much as they need to make a down payment, or even more. It's a way to give while you're still alive, rather than after. But be careful: A gift like this shouldn't have a negative impact on you.
"You've got to do things right. First, it's important to assess how this gift will affect your retirement. Money given to a child will no longer generate an income for you, so you have to make projections to ensure you have enough income to last for the rest of your life. It's something you have to do to avoid unpleasant surprises," said Audrey Bellefeuille T., senior advisor at Desjardins Group's Financial, Tax and Estate Planning Department.
Pay attention to tax implications
Giving a gift is a generous thing to do. But you still need to have the cash available to offer this support for the next generation. If you have to cash in an investment or sell an asset involving a capital gain, you should plan for the tax impact.
"Cash gifts to adult children aren't taxable for parents or for children," said Audrey Bellefeuille T. But some real estate transactions could result in higher taxes. If your child uses the money to acquire an income-generating asset, such as a rental building, attribution rules may attribute the rental income to the source of the initial funding, i.e., the parents. That won't be the case if the amounts are used to purchase an asset for personal use, such as a principal residence or cottage.
Parents often worry about what will happen if their child gets separated or divorced. "It's important to know that a gift is never considered part of the family patrimony or the matrimonial regime, whether it is given before or during the marriage," she said. "The amount given will therefore not be divided at the time of separation. For common-law partners, it's even simpler, since the concept of family patrimony does not apply."
The situation can become more complex if the gift was used to purchase a property that has gained value. "When the property is sold, the capital gain on the initial gift must be prorated. So it's important to retain records of the gift, ideally through a notarized contract. That will prevent potentially difficult conflicts in an already tough situation," said Audrey Bellefeuille T.
Other ways to help
It's possible to provide financial assistance without using cash. For example, if your house has become too big for your current needs, you could give it to your child and move elsewhere. But once again you have to do everything by the book.
"One thing you should absolutely avoid is selling your house for the symbolic price of $1," said Audrey Bellefeuille T. "Contrary to popular belief, this strategy offers no tax benefits, and could even lead to double taxation."
In fact, tax authorities will consider you, as the owner, to have sold your asset at fair market value. Only one home per family can be designated as the principal residence to qualify for the principal residence exemption. If you have more than one residence, you have to calculate which one will have the biggest annual gain. If the residence you want to sell doesn't get the principal residence tax exemption, you will be taxed 50% of the capital gain. Since real estate prices have skyrocketed in recent years, the amount you have to pay could be significant and you may not have the cash available to pay it that a sale would have generated.
Your child won't be spared either when the time comes to sell since the tax authorities use the actual acquisition price, even if it's $1, as the starting point for calculating the capital gain. "Before you consider gifting your home or selling it for a below-market price, you have to evaluate the short-term and long-term impacts," said Audrey Bellefeuille T. Once again, this impact may be reduced if the property qualifies for the principal residence exemption, but it is hard to predict whether your child will want to purchase a second residence later on. In this case, a gift without consideration is your best option, because the gift will be deemed to have been made at fair market value.
"If parents haven't completely paid off their home, they also have the option of making what is known as a gift with charge," she said. "The child takes possession of the house on condition that they take over the mortgage. This isn't deemed to be a sale at less than fair market value. It should all be documented by an agreement with the lender, of course."
Note that for a transaction between relatives, such as a parent and child, there are no land transfer taxes to pay, regardless of whether the transfer is made at fair market value or at a lower price. Paying one tax less counts for something too.
Another option is becoming the guarantor of your child's mortgage. That's what's known as a collateral mortgage, which allows you to use the equity on your property as a guarantee for the purchase of another residence. Your child could therefore avoid having to buy mortgage insurance from CMHC if their down payment is less than 20%. "Submitting an application to CMHC takes time. In such a fiercely competitive real estate market, that makes it unlikely for their offer to be accepted by the seller," she said.
Regardless of the method chosen, an in-depth analysis of the consequences for each party is essential, according to Audrey Bellefeuille T. Another important issue to consider is treating children fairly. In short, being generous requires a lot of thought!
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