inFocus: Helping your married children buy a homeDate: November, 2013
This article was originally published in the Comments Fall ’13 Issue.
After years of hard work in their family business and by making careful investments, Mary and Joe are in a position to help their married daughter, Isabel, and her husband, Bob, buy their first house together. Although Mary and Joe are extremely fond of their new son-in-law, they are concerned that the younger couple do not have a prenuptial agreement. With the knowledge that approximately 43 per cent of marriages end in divorce in Canada, Mary and Joe want to ensure that their investment in their daughter’s new family remains in the family. With these factors in mind, what are the various alternatives for Mary and Joe to help Isabel and Bob buy their first home?
If Isabel and Bob buy a home for $500,000, they could each take advantage of the First-Time Home Buyers Plan (HBP) to reduce the mortgage amount to $450,000. The HBP allows a taxpayer and his/her spouse or common-law partner to each withdraw up to a maximum of $25,000 from their RRSP to purchase their first home without having to pay tax on the withdrawal if they meet the following conditions:
- They are first-time home buyers (i.e., they have not owned a home in any of the five calendar years, beginning before the withdrawal date);
- The home is acquired by September 30 of the year following the withdrawal year;
- They begin or intend to use the home as their principal residence within one year from the date of acquisition; and
- They start repaying the withdrawal to their RRSP over a 15 year period beginning in the second year following the year of withdrawal. If a payment is missed then the amount of the payment will be included in income.
In addition, Isabel can claim a home-buyers amount on her personal tax return equal to a maximum $5,000 non-refundable tax credit.
If they take advantage of the HBP, the balance of $450,000 can then be financed by Mary and Joe as an interest-free registered mortgage. The couples should have a legal agreement documenting the interest rate (if any) and the terms of repayment. Should Isabel and Bob get divorced, the amount of the mortgage will be protected from Bob making a claim on the house since there would be a debt against the family home.
Another benefit with Option 1 is that since ownership is in Isabel and Bob’s name, and their home is their principal residence, when it comes time to sell their home, they will not have to pay capital gains tax on the ultimate gain, as their home can be designated as their principal residence.
If Mary and Joe do not have the available cash to loan to Isabel then another alternative is to buy the home as the legal owners and guarantee the mortgage. Isabel and Bob would be the beneficial owners and would make the actual mortgage payments. Legal ownership would transfer to Isabel and Bob once the mortgage is paid in full. Any outstanding mortgage amount could be forgiven in Mary and Joe’s wills.
Of course, with this type of arrangement, Mary and Joe would want to consult with their tax professional and lawyer and have proper legal documentation.
One advantage of Option 2 is that if Isabel and Bob sell their home, as the beneficial owners, they will be able to use their principal residence designation and pay no tax on the ultimate gain.
However, before considering this route, Mary and Joe would need to be careful to ensure that Isabel and Bob have the ability to pay the mortgage. Otherwise, Mary and Joe would have to make the mortgage payments on their behalf. And in a worst case scenario, Mary and Joe would have the legal right to sell the home, which could be emotionally difficult for them.
Both couples need to pay careful attention to the laws in Ontario as well as the tax consequences for any financial arrangement made to assist Isabel and Bob with their home purchase.
Connect with the Author
Deborah (Debby) Stern, BComm, CPA, CA, Deborah Stern CPA Professional Corporation, Partner – Audit & Advisory
Debby Stern is a partner in Crowe Soberman’s Audit & Advisory Group. She provides auditing, business advisory services, cash flows, personal and corporate tax planning and tax compliance to a wide variety of clients. Her specialties also include succession and estate planning.
The content of this article provides a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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