After years of hard work in their family business and by making
careful investments, Mary and Joe are in a position to help their
married daughter, Isabel, and her husband, Bob, buy their first
house together. Although Mary and Joe are extremely fond of their
new son-in-law, they are concerned that the younger couple do not
have a prenuptial agreement. With the knowledge that approximately
43 per cent of marriages end in divorce in Canada, Mary and Joe
want to ensure that their investment in their daughter's new
family remains in the family. With these factors in mind, what are
the various alternatives for Mary and Joe to help Isabel and Bob
buy their first home?
If Isabel and Bob buy a home for $500,000, they could each take
advantage of the First-Time Home Buyers Plan (HBP) to reduce the
mortgage amount to $450,000. The HBP allows a taxpayer and his/her
spouse or common-law partner to each withdraw up to a maximum of
$25,000 from their RRSP to purchase their first home without having
to pay tax on the withdrawal if they meet the following
They are first-time home buyers (i.e., they have not owned a
home in any of the five calendar years, beginning before the
The home is acquired by September 30 of the year following the
They begin or intend to use the home as their principal
residence within one year from the date of acquisition; and
They start repaying the withdrawal to their RRSP over a 15 year
period beginning in the second year following the year of
withdrawal. If a payment is missed then the amount of the payment
will be included in income.
In addition, Isabel can claim a home-buyers amount on her
personal tax return equal to a maximum $5,000 non-refundable tax
If they take advantage of the HBP, the balance of $450,000 can then
be financed by Mary and Joe as an interest-free registered
mortgage. The couples should have a legal agreement documenting the
interest rate (if any) and the terms of repayment. Should Isabel
and Bob get divorced, the amount of the mortgage will be protected
from Bob making a claim on the house since there would be a debt
against the family home.
Another benefit with Option 1 is that since ownership is in Isabel
and Bob's name, and their home is their principal residence,
when it comes time to sell their home, they will not have to pay
capital gains tax on the ultimate gain, as their home can be
designated as their principal residence.
If Mary and Joe do not have the available cash to loan to Isabel
then another alternative is to buy the home as the legal owners and
guarantee the mortgage. Isabel and Bob would be the beneficial
owners and would make the actual mortgage payments. Legal ownership
would transfer to Isabel and Bob once the mortgage is paid in full.
Any outstanding mortgage amount could be forgiven in Mary and
Of course, with this type of arrangement, Mary and Joe would want
to consult with their tax professional and lawyer and have proper
One advantage of Option 2 is that if Isabel and Bob sell their
home, as the beneficial owners, they will be able to use their
principal residence designation and pay no tax on the ultimate
However, before considering this route, Mary and Joe would need to
be careful to ensure that Isabel and Bob have the ability to pay
the mortgage. Otherwise, Mary and Joe would have to make the
mortgage payments on their behalf. And in a worst case scenario,
Mary and Joe would have the legal right to sell the home, which
could be emotionally difficult for them.
Both couples need to pay careful attention to the laws in Ontario
as well as the tax consequences for any financial arrangement made
to assist Isabel and Bob with their home purchase.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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