Putting your Kids on Title is Risky
Many people put their kids on title as joint tenants to benefit from the right of survivorship. This strategy is a “will substitute,” keeping the home out of the will and therefore shielding the home’s value from estate administration tax. Many people know this can be done because they were on title to their parent’s home. Since it worked in the past, it will work for them now by saving time and keeping money in the estate and away from the CRA…or will it? You may want to think twice…
This can be a useful estate planning tool when done correctly, but it is also risky depending on when and how you do it. Unfortunately, many lawyers do not explain the potential drawbacks and scenarios that may play out in the future, especially if the children on title are young adults and their life circumstances are likely to change. The issues we see most frequently relate to decision making, the principal residence exemption, capital gains owing, loss of the first-time home buyers’ rebate, Family Law Act considerations, and whether the home is a “true gift.”
When you add your kids to title, you are giving them an interest in the property and taking away your flexibility. If there is an existing mortgage on the property, you will need your lender’s approval and need to refinance your mortgage. Furthermore, if you want to refinance the mortgage or sell the property while the child is on title, you need your child’s approval. This means that you give up a lot of autonomy regarding your ownership rights. By putting your child on title, in essence, you are losing your ability to be the sole decision maker.
Under the Income Tax Act, taxpayers do not generally need to include any capital gain accrued from selling their principal residence in their income tax return. This means that any increase in value between when you buy and when you sell is exempt from capital gains. The bottom line is that the principal residence exemption is a powerful tool under the Act that directly impacts a family’s net worth, allowing families to sell their home and keep more money in their pockets and out of the CRA’s.
To qualify as a principal residence, the following must be met:
1) A property must be a housing unit;
2) The property must be owned and occupied by the taxpayer during the year;
3) The property must be ordinarily inhabited at some time during the year by the taxpayer, the taxpayer’s spouse, former spouse, common-law partner, or child; and
4) The property must be designated by the taxpayer as their sole principal residence for the year.
Consider a couple who acquired a property in 2009 for $350,000 and then sell in 2020 for $600,000. If the property is their primary residence, then no capital gain applies because they benefit from the principal residence exemption. They can take advantage of the full $250,000 increase in value, and it will not be included in their income for the year.
Where a property is not classified as a principal residence, a taxpayer must include 50% of the increase in the value of the property in their income tax as” income from property.” The capital gain only arises when the taxpayer disposes of capital property. We see that a primary residence is an exclusion from Capital gains under the Income Tax Act, but what if this were a cottage or an income property?
Consider the same couple as before. If they purchased a second property in 2009 for $350,000 and sell in 2020 for $600,000, 50% of the increase would be included in their income for the year they sell. The property “appreciated” $250,000, and thus $125,000 would be included in their income because it represents 50% of the increase in value.
The impact of capital gains and principal residence can complicate an estate plan where spouses put their children on title hoping for an effective estate plan but end up having a heavier tax burden because the child does not consider the home a principal residence as do the parents.
Consider this scenario: The same married spouses buy a home in 2009 for $350,000, and registered the property in their names, along with their adult son, then aged 25, then living at home. They do this as an estate planning tool. After several years of saving, the adult son moves into his own home in 2015. In 2020, the value increased to $600,000 and the spouses wish to downsize, using cash in the home for their retirement.
In this scenario, we have 3 owners, all with an equal interest in the property, 2 of whom classify the property as their principal residence and 1 who does not. In 2015, the property stopped being the son’s principal residence, meaning that under the Income Tax Act, a capital gain became due when he ceased living there and he will owe a capital gain on his portion of the property. If the property appreciated $250,000, the son would be responsible for $41,666, representing his 1/3 interest. That is a significant debt to the CRA! What is worse is that he may never have put any money into the home in the first place and the parents may end up paying a capital gain on their principal residence.
First-Time-Home Buyer’s Rebate
Every time you register a transfer/deed in Ontario, a purchaser must pay a land transfer tax. The rate is calculated as follows:
- One half of 1% of the first $55,000 of the purchase price;
- 1% on the balance of the purchase price up to and including $250,000;
- 1.5% on the balance of the purchase price up to $400,000; and
- 2% on the balance of the purchase price over $400,000
First-time homebuyers of eligible properties may get a refund of up to $4,000 of all or part of this tax if they meet the following:
1. Buyer must be at least 18
2. You cannot have already owned or had an interest in a home anywhere (even outside Canada)
3. Your spouse cannot own or have had an interest in a home anywhere (even outside Canada)
4. You must inhabit the property as your principal residence within 9 months of the title being transferred
The rebate is a significant incentive to non-owners to become homeowners. Because of the strict requirements for eligibility, a kid put on title to their parents’ property will lose their eligibility for the rebate because they are no longer “first-time” owners since they have an interest in their parents’ property.
Family Law Act Consideration
All property owned upon separation gets equalized under the Family Law Act. Depending on when you acquired an asset, different rules apply. If you are on title to a parent’s home, it is important to consider how and if your interest in the property may give rise to an equalization claim under the Family Law Act if and when you and your spouse separate.
Consider where spouses buy the same property in 2009 for $350,000 and put their son on title with them as joint tenants. The son then gets married in 2010 but separates from their spouse in 2020. The property is now valued at $600,000. In such a scenario the son’s percentage of the increase is subject to equalization through his ownership interest. Since the property appreciated $250,000, his 1/3 share is $83,333. This amount would be considered in his net family property. What’s worse is that if your child could not pay for it, you may have to pay it to stay in your home.
The right of survivorship in joint tenancy is also subject to creditor interests and is reflected in case law. Where the joint tenants are not married spouses, such as children, there is a presumption of a resulting trust, requiring the surviving joint tenants to rebut the presumption. This means that creditors can challenge a joint tenancy by asserting that any surviving joint tenant holds the property as a resulting trust for the estate of the deceased.
Thus, the property owned in joint tenancy may become part of a creditor’s claim, threatening the home or assets value of the other joint tenants. The surviving joint tenants ordinarily would not be responsible for the other’s debts. Also consider the fact that if you put your child on title, and they end up being sued for anything, or have a business venture that fails and you are a personal guarantee, your interest in the home may be at risk.
Another issue of putting kids on title is whether you have several children and if you want your entire estate to be divided equally between them. Your intention matters and parents don’t want to leave a mess for the kids to fight over. If you put a kid on title, then the will needs to back up your intention, otherwise, this can lead to litigation. If the will is challenged, there may be a presumption that you were holding the property as a resulting trust for the other beneficiaries.
Consider again the couple who buys a property in 2009 for $350,000 and places their son on. At the time of death of the last spouse in 2020, the home’s value is $600,000 and the property transfers to the son. But in the last surviving spouse’s will, they wanted everything to be divided 50/50 between the children. The issue of resulting trust applies here too. You need to spell it out in your will that at the time of going on title, that you intended to make a “true gift”, meaning that the home was to go to the son and was not to be divided between the remaining siblings.
At LDR Law Professional Corporation, we are knowledgeable about real estate, estate, and tax planning. We are happy to review your needs and help you plan in a tax-efficient way that helps ensure that your estate planning needs and goals align. Call or email us today to discuss how we can help.