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By  Jason Heath  on June 27, 2022


WHAT ARE THE TAXES ON TRANSFERRING REAL ESTATE TO YOUR KIDS?

By  Jason Heath  on June 27, 2022

Joan and her partner own the condo her son lives in, but they want to transfer
ownership to him. What are the tax implications?

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We purchased a condo for our son, who has been using it as his principal
residence for over 10 years. He has made improvements, but the title is in our
name. We would like to transfer the title to him, as he is now getting married. 

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How do we determine fair market value in a fluctuating market? He will not be
paying real estate fees. Are we able to gift a portion? Is it better to spread
capital gains over five years? We are both retired on a fixed income. Is
rent-to-own a better way to transfer?

—Joan


CLAIMING THE PRINCIPAL RESIDENCE EXEMPTION

When you transfer a capital asset like real estate to a family member, the
transfer takes place at the asset’s fair market value, and capital gains tax is
calculated accordingly. 

In Canada, the principal residence exemption allows the sale or deemed sale of a
qualifying home to be tax-free for a taxpayer. A transfer to a child would be
considered a deemed disposition” based on the property’s fair market value,
meaning capital gains tax as high as 27% of the property appreciation could
apply—that is, unless it could qualify as a principal residence.

In this case, Joan, the condo could qualify as your principal residence. The
Canada Revenue Agency (CRA) states that one of the conditions of a principal
residence is that it is “must be ordinarily inhabited in the year by the
taxpayer or by his or her spouse or common-law partner, former spouse or
common-law partner, or child.”

So, you could claim the principal residence exemption to have the transfer to
your son be tax-free to you. However, since you can only have one principal
residence during a given year, you would also wipe out 10 years of the principal
residence exemption for your own home. If you owned your home during the same
10-year period and you were to sell it after 20 years of ownership, for example,
half of the appreciation would be taxable.

If the appreciation on the condo has been greater than the appreciation on your
home (), or if you would rather defer paying tax, you could elect to claim the
principal residence exemption for the condo.

If you elect to pay the tax, note that capital expenses—which the CRA defines as
providing adjusted cost base, which in turn reduces the capital gain. However,
because the capital improvements were paid for by your son rather than you, they
would not qualify.

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Although you’re not required to get a formal valuation of the property for tax
purposes, you might choose to get one. Canadian Residential Appraiser (CRA) is a
designation granted by the Appraisal Institute of Canada. Its website has a tool
for finding a local appraiser. You could also consult a realtor or estimate the
property value on your own. 


THE TAX IMPLICATIONS OF GIVING OR SELLING A PROPERTY TO A CHILD

Given that your son is getting married, Joan, I can appreciate your desire to
transfer the property to him. Giving him the condo is a generous gesture, but
keep in mind your son could take out a mortgage from a bank to buy the property
from you in full or in part, or you could issue a mortgage to him.

For example, if the property’s value is $500,000, he could pay a down payment of
as little as $25,000 and borrow the other $475,000 from the bank. Or you might
choose to have him pay you $250,000, whether he borrows the funds or not, and
give him the other $250,000 of value. 

Gifts are not taxable in Canada, but whether your son pays you the property’s
full value, a partial value or nothing, the transfer or sale is still deemed to
take place at the fair market value. You cannot use an artificially low value to
reduce or avoid the capital gains tax.

If your intention is to gift the full value to your son, there could be a
benefit to taking back a mortgage for the full fair market value. In other
words, you could transfer a $500,000 condo to him and register a $500,000
mortgage at 0% interest. This could provide a degree of family law protection in
the event that he and his spouse were to separate or divorce.


DOES TRANSFERRING A PROPERTY OVER SEVERAL YEARS REDUCE TAXES?

As for your question about transferring the property to your son over five
years, Joan, the answer is: it depends. This could help to split the capital
gain over five years, but it may or may not reduce the amount of tax owing. It
really depends on your income and your spouse’s income. In particular, if you
are receiving Old Age Security (OAS) and the incremental capital gains income
causes your OAS to be clawed back because your income level has risen, it may be
better to have a clawback in a single year instead of multiple years. A tax
professional may be best to help you determine your approach. 

I do not think there is a rent-to-own angle here, Joan. However your son comes
to own the condo, the capital gains tax will be the same.

A consideration for other readers who are thinking about buying a home for their
children is to possibly have the property purchase take place in their names
instead of yours. This will allow them to claim the principal residence
exemption without affecting your ability to do so, as well as potentially
qualify for GST rebates, land transfer tax refunds and the home buyer’s amount
tax credit. There may be situations when buying in your name is preferable, so
this needs to be weighed against the potential tax-saving opportunities.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at
Objective Financial Partners Inc. in Toronto. He does not sell any financial
products whatsoever.


READ MORE FROM JASON HEATH:

 * The tax implications of owning multiple properties during probate



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