The temperature outside is not the only thing heating up, the Ottawa housing market continues to achieve new heights month over month without showing any signs of slowing down. According to the Ottawa Real Estate Board, the average residential house price in March was $758,802 which was up 35% from the same time last year. As housing prices continue to climb it is making it more difficult for first time home buyers to enter the market. Due to this, more parents are starting to help their children come up with a down payment to make their dream of owning a home become a reality. If you’re thinking about helping your children out with this, here are a few things you should consider before moving forward.
Providing a Loan vs Giving a Gift
Before transferring the funds it is important that you sit down with your child to discuss the details and expectations. If you will be providing a loan, it is critical to have supporting documentation such as a promissory note, loan agreement or registered mortgage on title of your child’s house. If you intend to give the money as a gift, this means you do not expect to be repaid. It’s important to review your financial plan to look at a gift scenario and ensure there is no chance you will ever need this money to support your retirement or future goals. We can help you by testing your financial plan and guiding you through these types of decisions.
If your child’s home purchase is being financed by a financial institution, they will need to show the money has been in the bank account for a minimum of 90 days before home purchase. Otherwise, you will need to sign a gift letter which the financial institution will provide. The gift letter is a legally binding document evidencing proof that the money from parents is a gift, not a loan.
Either way, we suggest you seek legal advice to build and execute a proper strategy that protects you and your child.
Addressing Estate Inequalities between Children
If you have multiple children, gifting money to one child and not the other(s) or gifting different amounts can cause inequalities. If you wish to reconcile these inequalities you can add a hotchpot clause into your will.
A hotchpot clause considers gifts, loans or advancements to children during a parents’ lifetime in the value and division of the estate, and is used to calculate how the estate is divided amongst the children and then subtracts the advances from each child’s portion when you pass.
In some cases where children have received larger loans, the hotchpot clause can be used to offset debt up to a specified amount if the value of each child’s share from the estate would be less than the loan received.
Purchasing a Matrimonial Home and How to Protect your Assets in Case of a Marriage Breakdown
If you intend to help your child and their partner purchase their matrimonial home, here are a few things that should be considered. Even though people enter a marriage with the hope that their love and partnership will last a life time, this is not always the case. It is crucial to plan for the worst and hope for the best. This will make it a lot easier than doing it in the moment with emotions get involved. If your child’s marriage does breakdown or if your child or child’s spouse is exposed to creditor issues this can call into question the intentions of the funds you provided them. Were the funds a gift or a loan? To mitigate this risk, timing and intentions are extremely important as it can affect who owns the property upon marital breakdown.
Under Ontario’s Family Law Act, gifts from a third parties during marriage are excluded from net family property and aren’t subject to equalization. Further, gifts received prior to marriage are a deduction only, and post-marriage income and gains are shared, unless a domestic contract provides otherwise. A matrimonial home has special treatment and its value is not deductible if owned at date of marriage and marriage breakdown. In the case of a matrimonial home, it may be preferable to make a loan to a child rather than a gift. That is because under Ontario family law, the loan reduces the net value of family property upon marital breakdown, meaning it is not included in the calculation for equalization payments and your child would not have to share the value with the ex-spouse.
A marriage contract or domestic contract (a.k.a prenuptial agreement) is a useful document to create before a union. These contracts can protect you, your child and your family’s wealth, but aren’t widely used because they can be awkward for families to discuss. Here is a great resource to help you initiate the conversation with your child on creating a prenuptial agreement.
First Time Home Buyer Incentives
As long as your child is purchasing their first home, they can qualify for the federal government’s Home Buyer’s plan, where they can use up to $35,000 of their RRSP savings ($70,000 for a couple) to help finance their down payment on a home.
For the funds to be able to qualify, the money being pulled from the RRSP must be deposited at least 90 days prior to the house’s closing date. To learn more about the program and see if it is right for your situation click here.
Call us to discuss if this is a topic on your mind. As homes are selling at record speeds and with summer right around the corner, make sure you and your child are on the same page so they can secure their dream property!