NextGen Home Ownership: Key Legal Considerations for Helping Your Child Buy Their First Home

In today’s real estate market, many families are helping their children purchase a first home by providing financial contributions, co-ownership, or guidance on legal and tax matters. While the intention behind these efforts is to provide support, they may give rise to unintended consequences if not carefully considered.

Certain government programs like the First Home Savings Account (FHSA) and the Home Buyers’ Plan (HBP) through RRSPs that can be great tools, but they only go so far. For families providing significant contributions, careful legal and tax planning is essential.

This post outlines some of the key legal and tax planning considerations to help families make informed decisions and preserve their wealth across generations.

Tax Implications

Real estate transactions in British Columbia can attract a variety of taxes at the federal, provincial, and municipal levels. Proper planning is essential to avoid unnecessary costs.

• Property Transfer Tax (PTT): In British Columbia, PTT is paid by the buyer at closing and is based on the fair market value of the home. On a $3 million property, the PTT can be approximately $68,000. An additional 20% tax applies to foreign buyers under the Property Transfer Tax Regulation.
• Unoccupied Homes Taxes: Families should be aware of multiple vacancy-related taxes, including the federal Underused Housing Tax, the provincial Speculation and Vacancy Tax, and Vancouver’s Empty Homes Tax. Each regime has different thresholds, exemptions, and filing requirements, many of which apply even if the home is not generating income.
• Anti-Flipping Rules: Both the federal and provincial anti-flipping rules may apply if the property is sold shortly after purchase. The federal rule deems profits on homes sold within 12 months to be business income unless certain life events apply. B.C.’s flipping tax, introduced in Budget 2024, imposes additional provincial tax on gains from properties sold within two years, with exemptions for specific circumstances.

Families should also consider how these taxes may impact the principal residence exemption, which can eliminate or reduce capital gains tax if your child occupies the property as their primary home.

Ownership Structures for Your  Child’s Home

When helping a child purchase a home, families must consider how title will be held. Different ownership structures come with different legal implications:

• Joint Tenancy: Both parties (e.g., child with parent, or child with a spouse or common law partner) hold equal interests, and the right of survivorship applies, meaning the surviving owner automatically inherits the deceased’s share. This bypasses the estate process but may not align with your family’s broader estate planning.
• Tenancy in Common: Allows for unequal ownership shares and, in turn, for each party’s interest to be distributed under their Will. This structure offers greater flexibility and may be preferred when parties contribute unequally to the purchase, but the associated value of such interest will be subject to probate fees.

Regardless of structure, a co-ownership agreement may be recommended to clarify contributions, responsibilities, and what happens if one party wants to sell or passes away.

Family Law Considerations

Even well-intentioned support from parents can become entangled in future family law disputes. If your child later separates or divorces, financial contributions used to acquire a home may be scrutinized.

Under British Columbia’s Family Law Act, gifts and inheritances are generally considered excluded property, meaning they are not subject to division. However, there may be exposure to gifts that:

• are not made to your child and their spouse or common law partner together, not to your child alone;
• are deposited into joint accounts with your child’s spouse or common law partner or used to acquire jointly owned property without documentation; or
• do not clearly set out the intention to gift in the documentation prepared at the time of transfer.

To preserve excluded property status:

• document the gift to your child alone;
• structure the support as a loan with a formal loan agreement, preferably with terms of repayment and optional security; or
• Encourage your child to consider entering into a cohabitation or marriage agreement with their partner to confirm the status of the gift while setting out other protections in the event of separation.

Structuring Financial Support: Loan or Gift?

Parents often struggle with whether to provide funds as a loan or a gift. Each approach carries different implications:

• Gifts are simple and may avoid conflict with mortgage lenders, but risk being treated as family property unless clearly structured and documented as an excluded gift.
• Loans may offer greater legal protection and potential enforceability but can impact your child’s borrowing capacity. Lenders may require the loan to be subordinated or excluded from debt service calculations.

In either case, consistency in documentation is critical. An informal or undocumented arrangement may be challenged by your child’s spouse or by other beneficiaries of the parents’ estate.

Rental Income and Tax Compliance

If your child intends to bring on a roommate or rent out part of the home, even on a short-term basis, tax and regulatory obligations must be considered:

• Rental Income: Must be reported annually using Form T776 under the Income Tax Act. If a portion of the home is rented, some expenses may be deducted; however, certain deductions can impact the principal residence exemption.
• Short-Term Rentals: Municipalities increasingly regulate short-term rentals. The federal government has also introduced changes to limit deductions on short-term rentals. Ensure the home complies with zoning, licensing, and usage rules, particularly if operating via platforms like Airbnb.
• Loans Secured on Income-Producing Properties: Special care should be taken when parents provide loans secured by homes that generate rental income.

Adding a Child to Title of the Parents’ Home

Some families consider adding a child to title of the parents’ home as a means of avoiding probate or simplifying succession. However, this approach requires careful consideration:

• Exposure to Claims: Your  child’s ownership interest may become subject to claims by their creditors or spouse.
• Tax Risks: The transaction could trigger a deemed disposition under the Income Tax Act, resulting in capital gains tax. In addition, a portion of the principal residence exemption may be lost if your child does not reside in the home.
• Loss of Control: Once a child is added to title, parental control over the property may be restricted, and reversing the transfer can be legally and financially complex.

Alternatives such as bare trusts, or the transfer of a property through a carefully structured Wills may provide better outcomes, depending on the family’s circumstances.

Estate Planning Implications

Whether you provide a gift, loan, or hold joint title, your estate plan should be reviewed and updated accordingly:

• Adjusting for Unequal Gifts: If one child receives assistance to buy a home, consider whether your Will should equalize other beneficiaries. Failure to do so may prompt claims under the Wills, Estates and Succession Act.
• Loan Forgiveness on Death: If your financial support is structured as a loan, clarify in your Will whether it is to be repaid, forgiven, or treated as an advance on inheritance.
• Encourage Your Child to Plan Too: A first home adds complexity to your child’s estate. They should have a Will and a Power of Attorney in place to ensure that the home is managed appropriately in the event of incapacity or death.

Final Thoughts

Helping a child buy their first home is a significant milestone. With proper planning and legal guidance, families can structure support in a way that minimizes tax, protects against family law risks, and preserves long-term succession planning. Whether you are considering a gift, loan, or co-ownership, our team is here to help craft a plan tailored to your family’s goals.

For more information, please contact Max S.J. Shilleto at mshilleto@lawsonlundell.com or 604.408.5408, or Tim H.R. Brown at tbrown@lawsonlundell.com or 604.631.9267.