Beyond the Down Payment: 10 Tips for Helping Your Child Buy a Home

The Growing Challenge

Homeownership rates among Canadians have been on a decade-long decline, from 69.0% in 2011 to 66.5% in 2021, with the most pronounced drop occurring among younger cohorts. Soaring home prices have made it increasingly difficult for young Canadians to achieve the same home ownership milestones as their parents. ^[1] As a result, many young people are turning to the Bank of Mum & Dad for help.

Ten Key Considerations

1. Assess Your Financial Situation

• While many parents want to help their children purchase a home, not everyone can afford to. The first step is to assess your own financial circumstances and plans.  Make sure that you are not compromising your own financial security.

2. Give a Gift

• When you provide your child with a financial gift, you are ceding control over those funds. Ensure there is a clear understanding that the funds are meant to be used for the purchase of a home and consider protecting your gift (see #8 for family law implications).
• There is no gift tax in Canada. Your child will not claim the gift as income or pay tax on it.  However, if you raise cash for a gift from your investment portfolio, you may have a tax liability in your hands if capital gains are realized on the sale of investments.

3. Leverage Tax-Free Accounts

• Rather than giving your child a large lump sum, consider providing smaller gifts over time to help them contribute to their Tax-Free Savings Account (TFSA), Retirement Savings Plan (RSP), and/or First Home Savings Account (FHSA). Your child may doubly benefit from the tax deduction resulting from RSP and FHSA contributions.
• RSPs: Building the value of your child’s RSP will allow them to benefit from the Home Buyers’ Plan (HBP), which allows first-time homebuyers to withdraw up to $60,000 from their RSPs tax-free to buy or build a home.
• FHSAs: This account helps first-time home buyers save for a home and earn investment income tax free. A maximum of $40,000 can be contributed to the plan, with annual contributions capped at $8,000. Withdrawals from the plan that are used for a home purchase are tax-free. Read Brad Weber’s blog on FHSAs here: https://live-nexus-im.pantheonsite.io/insight/first-home-savings-accounts-fhsa-are-here/

4. Loan Funds

• Instead of an outright gift, you can lend money to your child in the form of a loan/promissory note with no interest, or with interest. There is an expectation of repayment in the case of a loan versus an outright gift. A formal loan agreement should be drafted to outline repayment terms and avoid any future misunderstandings. The document can provide protection for the amount loaned in the event of the child’s divorce or separation (see #8 for family law implications). The loan can be forgiven at any time.
• As in the gifting scenario, if you need to raise the cash to make the loan from your investment portfolio, you may trigger a tax liability in your hands.

5. Co-Sign the Mortgage

• This option is attractive to some families as it doesn’t require a cash outlay and has no tax implications. However, as co-signor, you are responsible in the event your child defaults on the mortgage, which could affect your credit score and ability to borrow for your own purposes.

6. Consider Joint Ownership

• You could purchase the home jointly with your child, such that both you and your child have legal rights to the property. This arrangement protects your contribution/share of the property. In the event of a sale however, complications may arise with regard to claiming the principal residence exemption and/or in the event of your child’s marriage or divorce.

7. Set up a Trust

• A trust offers a flexible approach to transferring wealth to your children during your lifetime. While the trust can purchase real estate (it doesn’t qualify for the principal residence exemption), it’s often used to fund home purchases by distributing assets to your child. Establishing a trust involves legal fees, ongoing administrative costs and a trust document that outlines the terms and conditions governing the management of the property or funds. Careful planning is essential to avoid unintended tax consequences and ensure the trust aligns with your intentions.

8. Understand Family Law Implications

• Under family in Ontario, funds acquired by gift or inheritance are excluded from equalization calculations in the event of a marital breakdown, unless the funds are used to purchase a matrimonial home. In plain language, this means funds given to a child to purchase a home that is, or becomes, a matrimonial home will be divided equally between the child and their spouse if there is a marital breakdown unless proper documentation is in place to protect the funds. Proper documentation can include a promissory note or loan agreement, a deed of gift, or a co-habitation agreement/domestic contract.

9. Plan Your Estate Accordingly

• When there are multiple children, consider how the gift/loan impacts the rest of the family.  Most parents want to treat their children equally, and it’s unlikely that every child will purchase a home at the same time. Consider updating your wills to include an equalization provision or a “hotchpot” clause to recognize any advance gifts and ensure the other(s) receive the same benefit.

10. Seek Professional Guidance

• Legal Counsel: Consult with a lawyer to fully understand the legal implications of different strategies, especially regarding family law and co-ownership issues.
• Financial Planning: Your Nexus Wealth Planner can help you assess your financial situation, determine the appropriate level of support, and structure the assistance effectively.
• Tax Advice: A tax professional can ensure compliance with CRA rules and optimize your financial support to minimize tax burdens for both you and your child.

Supporting your child in purchasing their first home is a significant and generous decision with various implications. By carefully considering the above factors and seeking professional advice, you can ensure a positive outcome for both you and your child.