I have client who is on title of her daughter’s home so she could obtain a mortgage. She only owns 1% and the daughter owns 99%. The daughter lives in the home with her husband and they pay the mortgage and make all the decisions.
This sounds like a classic Bare Trust where the daughter is the beneficiary and settlor, and the mother is the trustee. But what about the daughter’s husband? He is not on title but sounds to me like he may also be a beneficial owner. Of course there is no documented Bare Trust agreement. My client is the mother and I have no dealings with the children. I am not a lawyer and don’t feel comfortable drafting legal documents on their behalf and bringing in a third party who is not currently named in any legal capacity. So my question is do I have to include the daughter’s husband on the T3 return? Or is it still correct to leave him out?
This article in the Globe has made me very hesitant to write DIY legal agreements when I’m not even in consultation with the parties involved.
EDIT - I just received the purchase and sale agreement from my client. She actually only owns 0.01% and the daughter owns 99.99%. Is there even a trust here?
I attended a course recently (online) and they stated that a bare trust may exist where only one spouse is on title of a house and the other spouse is at least a partial beneficial owner. My husband and I have this situation therefore we created a bare trust … Something also to consider is the impact on each spouse (and other title holders) for the principal residence exemption.
The potential issue is down the road when the daughter sells the house. Should CRA review this situation and no bare trust was reported, they could take the position that the mother actually owned that small ownership interest in the house. If the mother has used her PRE for years that the daughter owned the house, CRA could deny the daughter’s PRE claim for those years. Likewise, if the daughter claims the PRE, the mother’s subsequent PRE claim could be denied/limited. There are potential landmines when ignoring the filing of these bare trust T3’s. Explaining to CRA at that point that there really was a bare trust could lead to filing prior year returns and paying the exorbitant penalties.
Due to the increasing gap between real estate prices and affordability many potential home buyers no longer qualify for a mortgage large enough to purchase a home. I’m not sure this actually addresses the affordability issue but the proposed solution suggested by many lending institutions is to have a parent or other credit worthy party co-sign the mortgage.
My understanding is that in Canada you can’t co-sign for a mortgage unless your name is on title to the property. This is why you see these low percentages of ownership, just to get the co-signers name registered on tittle.
A co-signer is different than a mortgage guarantor, who’s name does not need to be on title. The issue for the bank is a co-signer is immediately responsible for each and every mortgage payment as if they were the borrower. A guarantor is not responsible until the mortgage actually falls into default. One can clearly see why the banks and mortgage companies would prefer a co-signer over a guarantor.
May is the operative word here, you really have to get into the facts, and consider family law in your jurisdiction.
Just because someone lives in the house doesn’t mean they have even a beneficial ownership. For example if a child or a grandparent lives in the house we wouldn’t assume they had beneficial ownership.
Also the right to future ownership (on division of assets in a relationship dissolution) does not mean that a spouse owns the house now. If they did not contribute to the purchase of the house - ie if the house was owned before the relationship - then a trust is actually unlikely.
@snoplowguy
Huh. I guess I never looked that closely at the land title or other documents. I’ve “co-signed” for one daughter’s house purchase, and another daughter’s car purchase. My father “co-signed” for my first house purchase (about 35 years ago). I don’t know if any of these were actually registered on title, or at what “percentage ownership”. Perhaps the lawyers or bankers used the term “co-sign” when it was actually just a “loan guarantor.” Now I think I will have to look it up and see if there is a bare trust situation which I didn’t realize.
Thank you everyone for weighing in! I appreciate all your contributions. @kevin Yes the daughter’s PRE was exactly my concern at first but then I realized if she sells the home down the road for $1M, the mother only has to pick up $100 proceeds on her return. The daughter will report $999,900 and claim the PRE. The risk is low.
@dawna777 I think I saw the same seminar but this area is very GREY and they are not even my clients. As @jglass points out, there are many things to consider including family law. This is not my place and could open me up to liability if I start giving out legal advice. The way CRA has rolled out this new legislation inappropriately puts it on accountants laps when in fact it should be with lawyers.
Ultimately, my advice to my client (the mother) was that she should seek legal advice to determine if a trust really exists. But I muttered to her under my breath that I think her risk is low.