Mom, Dad; Help!

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In our last blog, we touched up on ways first time homebuyers could still afford their dream place even with the new mortgage rules in place, and that parents helping out through gifting a down payment and money was one of the solutions. This week, we elaborate more on how parental help can help their children and their spouse afford their first home; they are needed more than ever because it’s gotten expensive!

Baby boomers across the country are do not want to deal with multi-generational living anymore – and it’s gotten to the point where they’re willing to solve the problem with cash. A recent CIBC poll claimed 76% of Canadian parents would give their kids a financial boost to help them move out, get married or move in with a partner.

House prices these days can be almost unaffordable for millennials, especially with high unemployment and low wages.The aforementioned boost might not even be enough!

If you’re in a position to help your kids buy a home, you have many options. A gift (aka living inheritance), can be a very good option.

As a baby boomer, you’re in the middle of an unprecedented wealth transfer that is thought to be in the range of $750 billion in cash, property and investment holdings. If you’re fortunate to be in a position where you don’t need the money coming to you, that windfall will just amount to a big tax hit. However, if you were to turn around and gift it to your kids, it’s no longer a tax burden for you or them. There are long-term tax implications of gifting money: namely less for your kids to pay in estate tax when you die. Gifting money is a way to take it off your books, without putting it on your children’s books.

“Shirtsleeves to shirtsleeves in three generations” is an old proverb neatly sums up what happens when large sums of money are passed down through a family. Sadly, you often hear of generations spending all that money away after inheriting in, ruining their chances of passing some on to their next of kin.

While you still have some control over where your money goes, gifting a portion of it towards the purchase of an appreciating asset for your children is sensible. Don’t gift that money in the form of straight cash—it would be too easy for your kids to spend it recklessly.

Also don’t gift a piece of property over to your kids. This is seen as a gift of assets “in-kind” and the CRA will treat the transaction as if you sold the property at fair market value. You’ll be hit with a huge tax bill for 50% of the capital gains, which could be substantial on an inherited property bought decades ago.

To gift the money for a real estate purchase, you’ll sign a letter confirming that the money is a gift and isn’t required to be paid back. On the morning of signing day, you’ll transfer the funds to your kid’s account. Most primary lenders need to see money in the account before they complete the mortgage transaction.

On the downside…

If you want to help your kids with their mortgage and you don’t have the liquidity to hand over a sizeable amount of cash, the other option is to co-sign their mortgage. The problem with this approach is varying degrees of liability. By co-signing the loan, you are taking responsibility if things go wrong for your child if they can’t pay their mortgage. You can potentially be putting your financial future at stake. You’d have to feel very confident towards your kid and their spouse that they will not be defaulting on their mortgage.

Gifting a portion or all of the down payment, like gifting anything else, severs the tie you have with the money. None of it belongs to you, nor does the liability that comes with how it will be used.

What’s the best part about gifting your kids money to buy a home? You will see the benefits when you are invited over for the first time and can see the fruits of all your hard work and kindness: a better life for your children and their family!