When Your Child Buys a Home

Mortgage alphabet

With current real estate prices and stricter mortgage rules, first-time home buyers can find it very difficult to purchase the home they want. Many, in situations like this, turn to their parents for help, and parents are often willing to gift their beloved children money for the down payment. We do not judge that at all - quite the opposite, we welcome that kind of help!

But is it actually a good strategy?

Some young people genuinely know how to appreciate financial help, while others start to realize they've gained access to unlimited funding from their parents, and take advantage of it again and again. There are plenty of examples of young people asking their parents for money for basic necessities, only to spend that help on expensive purchases instead: TVs, the latest gadgets, and so on.

There may well be other ways to help your children while also teaching them the basics of budgeting and managing household finances.

Loan or Gift?

Instead of simply handing over money (even for a down payment or to pay off credit card debt), you could lend that same money instead. That approach carries far more educational value. After all, we rarely get anything for free, right? Usually we have to work for what we get. For example, if we take out a loan from a bank, we have to pay it back. So why should the system work any differently when it comes to parents? Of course, when it comes to qualifying for a mortgage, it's easier to get bank approval on money that was gifted. But even just discussing the option of a loan - interest-free or not - and putting together an informal agreement will make your "gift" that much more meaningful.

Informal Education

Introducing a system of loans into your relationship with your children can be an excellent way to teach them that every purchase carries real financial consequences. And if your child doesn't grasp that, serious problems can follow.

Our Take

Many of us have young children, and for most of us, the day we'll have to deal with our kids' first mortgage down payment is still a long way off. That said, now is the time to start teaching children responsibility, and the fact that money doesn't grow on trees. Naturally, every family is unique and should act according to its own values.

There's also an alternative way to help your children buy property. For instance, if parents can't or don't want to gift or lend money, they can act as guarantors on their child's mortgage.

The Canada Revenue Agency (CRA) recently responded to a taxpayer's question involving exactly this kind of credit guarantee. Here's how the situation unfolded. Two taxpayers (let's call them Ivan and Maria) decided to divorce. Maria decided to buy her own home. Her parents agreed to act as guarantors on the mortgage so that Maria could buy a new home, since she had no credit history of her own and, before the divorce, had only used credit cards held in her ex-husband's name. Maria's parents didn't live in the new home. They also didn't contribute any money toward the purchase, and didn't pay for utilities, property taxes, or repairs. They and Maria signed a document stating that the parents "have no financial interest in this home." At the same time, the parents held legal title to the new home, since the bank required them to be added as co-applicants on the mortgage.

Meanwhile, Maria's parents have their own home, where they've lived for many years. Maria and her parents wanted to keep their names on title to the new home, so as to avoid paying a property transfer tax later when their names are removed. Maria asked the CRA what would happen if she decided to sell the home in the future. Would the fact that this is her principal residence exempt her from tax? Or would the proceeds from the sale still be taxable for her parents, since their names appear on title?

According to the CRA, a "principal residence" is considered to be "property owned by the taxpayer at any time in the year."

That said, the word "owned" doesn't have a precise definition in this context, which means there are two kinds of ownership to consider - legal and beneficial (actual). In most cases, these two align. But there are situations where one person is listed as the legal owner on title, while someone else actually lives in the home and receives all of the financial benefit from it.

The CRA stated that if Maria and her parents genuinely consider Maria to be the beneficial owner of the home, with her parents holding legal title only because of the mortgage guarantee, then Maria would bear full responsibility for any future capital gain if the home is sold down the road. In other words, Maria would likely be able to claim the principal residence exemption from capital gains tax, which would allow her parents to avoid paying the tax in question.