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The New Normal: Assisting a Child with Buying a Home

A current trend in the increasingly expensive Canadian housing market is parents helping children or grandchildren and their spouses with a down payment or mortgage on a first home. In Ontario, about 35% of people buying homes now receive assistance from their relatives with a down payment and approximately 38% have a down payment of 20% or more. To see statistics for down payment assistance across the country, please refer to this link. Although such financial assistance is helpful for a child or a young couple looking to get into the housing market, this generous gesture can lead to unexpected and undesired consequences and even disputes, including upon a child’s marital breakdown. Without having done the proper planning or evidencing their intention, parents may even see a child lose their gift to a former spouse.

Under the Ontario Family Law Act (the “FLA”), the value of gifts and inheritances received during marriage are excluded from equalization. However, if the gifted or inherited amount is used to purchase a matrimonial home, it loses its exclusion and its value will be divided equally between the child and his or her spouse upon a marital breakdown or death of the first spouse to die.

A common issue that arises is whether the money was a gift or a loan to the child or the couple. For example, parents provide their son $100,000 to put towards a down payment on his first home with his spouse. The couple purchases the matrimonial home with the monies received from his parents, but after a few years, the child and his spouse decide to separate. Unless there is proper evidence to support the parent’s intention, there will be confusion as to whether the monies advanced are a gift or a loan.

To evidence their intention, parents should ensure proper documentation is in place when assisting children with a down payment on or mortgage for a home. Too often it seems monies are advanced without clearly thinking through what the arrangement is meant to be. If a loan is intended, supporting documentation, such as a promissory note, or a loan agreement, which includes where appropriate depending on the terms of the arrangement, a repayment schedule, provisions for interest and the applicable rate, should be prepared. In some cases, parents may wish to register their interest on title to the child’s home to secure their interest.

If their intention is to gift the monies, this should be done in writing, including by way of a deed of gift. Documentation is paramount, as case law holds that in the absence of proof of intention to make a gift, the law presumes that a gratuitous transfer of property from a parent to an adult child is held in trust for the parent by that child and is therefore not a gift (Pecore v Pecore, 2007 SCC 17). However, recent case law demonstrates that in the context of a down payment for a matrimonial home, courts will look to intention and documentation to determine whether a gift was actually intended (see Chao v Chao, 2016 ONSC 7911).

Parents should also consider how gifting or loaning a down payment affects the rest of the family and what their policy will be for the other children. If parents are concerned that they have loaned or gifted assets unequally among their children, they should consider using an equalization provision, including a legacy or a “hotchpot” clause, in their Will. An equalization provision allows parents to address any major amounts gifted to one child and ensure the other children receive the same benefit.

With the housing market being increasingly difficult for young couples to enter, before providing financial assistance to a child, parents should seek legal advice with regard to available options to provide financial assistance and ensure they have appropriate documentation in place. Financial assistance for adult children seems to be the “new normal”. As the “Bank of Mom and Dad” is now open for business, parents should take steps with professional advice to protect themselves and their children.

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.