The Tanguy phenomenon hit the big screen in the early 2000s thanks to filmmaker Étienne Chatiliez. This phenomenon that pushes young adults to live longer and longer with their parents could soon give way to another trend: that of returning to live in the family home, but this time without mom and dad! My last column answered a question from a reader who wanted to know the best way to help his children access property: among the solutions considered, there was the gift of equity, which deserves to be detailed here.
For now, the gift of equity is rather rare, like young professionals who dream of buying their parents’ house as their first property — a symbol of their new independent life! — do not roam the streets. But with the new real estate reality, this solution could become a more common practice. In fact, if the expected correction ultimately turns out to be less significant and single-family home prices hold at current levels, access to home ownership for first-time buyers will remain a major financial challenge.
Take this scenario: as they get older, the parents, once again a couple, want to either redefine their living space in order to reduce their maintenance burden, or live full-time at the cottage once retired. For their part, the children, who have become young adults, want to start a family and buy a single-family home, but they are at the start of their careers and their incomes are therefore lower. Parents can then transfer their house that has become too big to one of their children, with the equity gift strategy, and buy a smaller house better suited to their new needs.
Tax issues to consider
The equity gift allows you to transfer your property to your child at a reduced price and adapted to his financial capacity. However, it must be understood that all transactions between non-arm’s length persons must, according to the Income Tax Act, be carried out at their fair market value. So you can’t give away your house for 1 dollar even if you can afford it! This would result in double taxation given the application of the attribution rules.
Thus, in accordance with tax rules, the difference between the price agreed with the child and the actual market value of the property will be considered a donation. Confirmed by notarial deed, it will replace or improve the child’s down payment, which will facilitate access to property. Note that if it is the main residence, the transaction could be done without tax impact, which is not the case for a secondary residence, moreover. It is therefore best to consult your legal and tax advisors before proceeding!
A donation is a donation!
The benefits for the child are undeniable. It is possible to combine this strategy with the Home Buyers’ Plan (HBP), which generally also avoids the costs of the Canada Mortgage and Housing Corporation, and the transaction can be done without mutation. However, parents must understand that this gift is irrevocable! Therefore, the importance of legal advisors in this type of transaction should not be underestimated, especially if your child wishes to acquire property as a couple.
In the event of your child’s death, the settlement of his or her estate could result in his or her spouse indirectly inheriting this gift through the bequest of the house in question. It is therefore important to make it a proper asset for the child by a notarized deed of gift so that he can take back the property as well as pocket his capital gain in the event of a breakdown of the union. In addition, notarizing the gift makes it unseizable by your child’s creditors.
Finally, if you have several children, you should consider this strategy having already thought about your ability as parents to provide an equitable helping hand to each of them. Brother or sister could well cherish the same project of a first house in the next few years, and you will perhaps then no longer have a house “to give away”. The cash gift to your adult children so that they contribute to the new TFSA (tax-free savings account for the purchase of a first property), whose introduction is planned for 2023, could in this case be the most appropriate solution.