“Family transfers” refer to property transfers between either members of the same family or similarly close individuals. Family transfers are often completed as part of an estate planning strategy when one person, often a parent, is nearing the end stages of life and wishes to add a spouse or child to title during his or her lifetime in order to pass the property outside of probate which can add thousands of extra dollars to an estate.
Family transfers should not be undertaken lightly. While seemingly straight forward, any property transfer is likely to create a change in the transferor’s rights and benefits. For that reason, care should be taken to ensure that additional taxes or obligations are not automatically added and an accountant and/or lawyer ought to be consulted for advice.
If a parent or spouse wishes to ‘gift’ property to another person or persons but wishes to remain in the property, we can create additional documents in support. Commonly used documents are a bare trust agreement or inter vivos gift deed. The land title office has newer disclosure requirements with respect to the ultimate beneficiary/owner of a property and consideration must be made with respect to whom the owner is and when there is a change of beneficial as opposed to legal ownership.
To book an appointment to discuss a family transfer, please use our consultation form and one of our advisors will be pleased to get back to you to set up a time to discuss your situation further.
Ways of Transferring Properties
If you are considering transferring your home to your child, there are typically four ways you can do this.
Not everyone wants to wait until their death for their kids to get their home—you may want to give it to them earlier, so that they can either sell it to clear up any debts they might have or continue investing in it for themselves or future generations.
Here is a breakdown of how each option works:
1. SELL YOUR HOME TO YOUR CHILD
You can sell your home to your children, even if you plan to live in the house until you die. You sell it to them at fair market value (FMV), and you can even loan money to them to help them purchase it from you. Or, if the children can buy the home but you want to remain living in it until you die, you must work something out where they stay for free or for rent or otherwise. What about tax consequences for transferring your property to a child? If you transfer property at FMV, it will not be subject to attribution rules—there will be no tax owing. Again, get the proper advice on this.
What if you don’t want to sell it to your children at FMV? Can you sell your home to your son or daughter for only a dollar? This is a common question asked by parents in this situation. The truth is, this low sale won’t typically save, reduce, or defer capital gains tax, since none will apply as these are typically primary residences. It doesn’t save you from the tax treatment and there are other taxes and fees on real estate aside from income tax.
2. GIFT YOUR PROPERTY
Another option is to give your property to your children. The better way to do this is through a revocable living trust, in case you change your mind in the future. You must ensure your children are financially responsible and able to take on the home, because if they are unable to make the payments, the property could be foreclosed and removed from the family.
It’s important to note that any large gifts of property or money will get flagged by the Canadian Revenue Agency (CRA). Although these gifts are common and well received by the recipient, the CRA may place tax rules that could increase your income taxes and prevent this situation from being evenly beneficial for both you and your child. Canada does not have gift tax, but it will notice a gift as large as a home. But what is the purpose of these tax rules? They are to ensure that taxpayers do not abuse income splitting strategies, which are designed to shift taxable income from those in high tax brackets to relatives in lower brackets.
3. BEQUEATH YOUR PROPERTY
You can also put a trust in place with a plan for how your property should be distributed after your death. If one of your heirs wants your property, you can make equitable financial arrangements to compensate and leave extra money to the other heirs who don’t want to inherit the home. A professional should help you set up any such trust.
4. DEED/TITLE TRANSFER
Finally, you can also transfer the title of your home as if you were to change the ownership to anyone else. You can sign a transfer-on-death deed for your property and it will be passed along to your designated heir. However, this option may not be available in every province. Title transfer is a good option if you still have a mortgage on the home. You can add your child as a co-signer or transfer the mortgage entirely. Land transfer taxes may apply though.
AVOIDING ATTRIBUTION RULES
If you choose to gift your family home to your child, here are some ways to avoid additional taxes and attribution rules, all of which should be discussed with your real estate lower, tax lawyer or accountant before proceeding:
- Make gifts to your adult children to allow them to earn sufficient income to absorb their deductions, credits, and other expenses that you would normally pay off from after-tax dollars.
- Give them enough funds to make the maximum deductible contributions to their RRSPs.
- Deposit Canada Child Tax Benefits or Universal Child Care Benefits into their bank account or a Registered Education Savings Plan (RESP)—attribution may not apply to income earned on these funds.
- Avoid 50% ownership transfers as they may be heavily taxed on any future increase in value, if your child has a principal residence of their own.
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