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
Gay Wise
gaywise@wisefinancialservices.ca
250-743-5999
1757 Shawnigan Mill Bay Road
Shawnigan Lake, BC, Canada
V0R 2W0
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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).
Can a similar approach to what you explain in Method 1 work when Parents add adult children on title to their homes to avoid probate fees? Or will that trigger a capital gain on the adult child when the parent dies regardless of an agreement.
Maybe. It does introduce the Bare Trust issues now, however.
IF the documentation is good and IF it is accepted by CRA (if audited) then the method described still has potential to be successful.
I’m wondering now though if a formal trust isn’t maybe a better solution (ie Alter Ego or Joint Trust)? That way the ownership is clearly documented - although in BC one still has to file a Land Ownership Transparency Report annually as the “owner” is the individual on title, but the actual owner is a Trust…in whose name the property cannot be registered. (This would be easily fixed if the stupid provinces would simply allow a trust to register for land ownership…)
Yes it may be effective in Ontario and I am in the process of working through this for my mother’s estate. Just so you know, probate in Ontario is based on BENEFICIAL ownership. So this strategy will ONLY work if no probate application otherwise needs to be submitted at all. If one asset is forgotten (ie one bank account in the deceased’s name only), then ALL assets need to be included on the probate application, including anything owned beneficially such as joint bank accounts and property. Most people don’t know this and in the wake of the new Bare trust disclosure, probate planning can easily become compromised.