In today’s housing market, it is becoming increasingly difficult for first-time home buyers to afford to purchase a home. In a new report published by Royal LePage, home prices in Canada are expected to rise significantly in the second half of 2018. The continuing rise in prices, according to the Canada Mortgage and Housing Corporation, can be attributed to overvaluation and price acceleration in most of the country’s major cities. As a result, more and more parents are lending a helping hand to their children to assist them with acquiring their first home.
A recent article in the Financial Post cited a CIBC Poll of 3,021 randomly selected Canadian adults, which found that 76% of Canadian parents with a child 18 years or older would be willing to give their children a financial boost to help them move out, get married, or move in with a partner. Canada generally has no rules limiting how much an individual can gift, either in their lifetime or upon death. However, while gifts themselves are received tax-free, taxes can arise in the hands of the grantor depending on what is being gifted. For example, a gift of real estate made “in-kind” is treated as if the grantor sold the gifted property at fair market value, which could trigger capital gains tax on any increase in value in the property from the time it was acquired to the time it was gifted.
While most parents are simply trying to help their adult children get a head start, it is imperative that they consider not only the potential tax consequences, but also whether they are making a gift or a loan to their adult children. Greco v. Frano (2015 ONSC 7217) illustrates the importance of parents’ making their intentions clear and formalizing their arrangements, even when dealing with their own adult children. In this case, the plaintiffs were husband and wife (the “Grecos”) and the defendants were their son-in-law (“Mr. Frano”) and the estate of their deceased daughter (“Mrs. Frano”). In 2003, the Grecos sold their home and moved in with the Franos. Shortly thereafter, Mr. Frano asked the Grecos for financial assistance and the Grecos advanced $90,000 to the Franos. There was no written evidence of an agreement, no interest was paid on the advance and no amount was repaid. Mrs. Frano died approximately six years later, at which point the Grecos asked Mr. Frano to return the money they had lent him so that they could move out and purchase a new home. Mr. Frano refused, claiming the $90,000 had been a gift. The court held that the $90,000 was a loan, as the law of equity presumes bargains, not gifts. Therefore, the onus was on Mr. Frano to rebut the presumption that the advance of $90,000 to him and Mrs. Frano was a loan. Mr. Frano was unable to meet this evidentiary burden, as there was no written evidence that it was a gift. In particular, the court noted that the size of the advance to the Franos from people of limited assets was the most telling piece of evidence, stating that it is “implausible that an elderly man of limited means would gift approximately 75% of his assets.”
The court in Greco v. Frano offered a piece of advice to recipients of advances such as these: if recipients want to ensure they do not have to repay the advance, they should put it in writing or have some other evidence to support it being a gift rather than a presumed loan. Accordingly, if a parent intends to make a gift of funds to their adult child to purchase their first home, this should be specified in writing or in a deed of gift. To avoid disputes, a promissory note, loan agreement, or registered mortgage on title to the adult child’s home should be considered if a parent intends to make a loan to their adult child, as proper documentation provides protection if a loan repayment needs to be enforced.