A friend & client of mine paid the downpayment on a house for her son & his wife. At the time she went on title, so has a 50% interest. She now plans to gift her interest to her son & wife. Is there any way for her to avoid a capital gain?
The downpayment was a gift, was it not? Your client’s intention was to help her son, not to obtain ownership in a piece of property, correct? As such, there would be nothing to report for tax purposes. However, the legality of her being on title would raise the question, “Why didn’t she just gift her son the required cash?” Your client would be wise to have an answer prepared, with supporting documentation, in case she needs to “prove” it to CRA and/or the tax court.
Thanks for your response, it is helpful
1757 Shawnigan Mill Bay Road
Shawnigan Lake, BC, Canada
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^The client should seek legal advice, but as I see it you can’t have your cake and eat it. The parent presumably had a reason (on which I could speculate but will refrain) for taking 50% ownership in the property rather than making an outright gift in the first place. Thus, if the property has appreciated since acquisition, a gift of the 50% interest now will trigger a capital gain. The parent has the option of designating her interest in the property as her principal residence (PR) providing she (and her spouse if any) does not designate any other property for the relevant period. (Occupancy by a child of the taxpayer qualifies for purposes of the PR deduction.)
This kind of question comes up pretty regularly, and in most cases, the payor has not invested in a small modicum of advice prior to the transaction. The tax issues can be sidestepped, or at least documented in the interests of doing so. Briefly, either of these approaches, if fully fleshed out, can alleviate the problems:
Method 1: Write an agreement stating that it is for security only of the funds advanced and protection of assets, and there is no beneficial interest in the property by the payor. Sign and hold. Release title to intended full owner when ready. The agreement signed and witnessed IN ADVANCE OF THE FUNDING provides a degree of certainty to CRA that the funder indeed had no interest in the property.
Method 2: Loan the funds to the child, take a second mortgage on the property behind the bank, with nominal interest rate. (Banks hate this however and often “require” the funds to be gifted to the child. Not sure that is proper, but it often occurs. Still, even after gifting the funds, there is nothing to stop the parent from securing via mortgage.)
Doing tax planning after the fact is more likely to fail. Likely stuck with the gain (expensive lesson) or losing some years of PR claim on the “real” residence (which may or may not matter to the parent).