Last week, CIBC Economics released a report titled “Gifting for a down payment -perspective” by its Deputy Chief Economist, Benjamin Tal. The report provides a wide range of statistical data in relation to the value and type of gifts parents are providing to their children to purchase houses.
Some of the key statistics in the CIBC report include the following:
1. Over the last year, CIBC estimates gifting totaled just over $10 billion for family member house purchases, which accounts for 10% of total down payments in the market as a whole for that period
2. Almost 30% of first-time home buyers received assistance from family members
3. The average gift is now approximately $82,000
4. Where the gift is the primary source of the down-payment, the gifts average $104,000 for first-time home buyers no less than $157,000 for mover uppers
5. CIBC reports that only 5.5% of the gifting parents used debt to finance the gifts (that percentage rises substantially for gifts for homes in Vancouver and Toronto) and therefore it appears parents are using their savings to make these gifts
Whether a gift is $50,000 or $200,000, the amounts are substantial and many parents never planned or conceived of gifting such large amounts of their savings. Whether parents are encroaching upon their retirement savings for these gifts is an interesting topic for another day.
However, what I want to discuss today is; whether some parents should be making loans in lieu of gifts, to protect their family money under the various provincial family law acts (in the case of a marital breakdown), where the child will use the gift to buy a home.
Before I go any further, I want to note that I am not a family lawyer. This blog post is general in nature and should not in any manner be considered as legal advice. This blog is being posted to caution parents who are considering making a housing gift to seek family law advice before doing such. I say this because not only is the family law complicated in regard to monies used to purchase a matrimonial home, but the question of whether the monies are better made as a loan versus a gift is a legal minefield of its own. I humbly suggest the legal costs will be worth the piece of mind and/or the potential financial savings to the family.
Gifts vs Loans
Where there is a marital breakdown, one of the key issues in respect of money given to a child to purchase a home is whether the money was a gift or loan. That characterization can be the difference between a family keeping or losing thousands of dollars. I will assume for purposes of this discussion, there is no pre-marital agreement dealing with this issue, which is often a suggested option by lawyers, but very rarely acted upon.
Family lawyers (in Ontario) have told me, that in general, gifts or inheritances received during a marriage that are kept separate from the family property will typically be excluded property and not be considered family property subject to division (I am not aware if all the provinces have the same general rule, you will have to check with a family lawyer in your province). Thus, children are often told by their lawyer or their parent’s lawyer to keep a gift or inheritance invested only in their name and not to co-mingle these funds in a joint spousal bank/investment account or pay joint expenses. I have also been told however, that if a gift is used to buy a matrimonial home, it will no longer be excluded property. Again, confirm this all with a family lawyer.
A loan would typically be secured by a promissory note, which lawyers have told me in general should be deducted as a liability as net family property. Sounds simple, but as per this article "Promissory Notes Between Parents and Their Married Children" by Nathalie Boutet, Managing Partner, Boutet Family Law & Mediation, properly documenting and executing a promissory note is far from just writing a note out on a piece of paper. The importance of legal advice is further strengthened when you read in Ms. Boutet’s article that a debt can be discounted even if a promissory note is valid and has not been forgiven, if there is a low probability that the parents will collect it. Ms. Boutet notes the discount can be as high as 90%-100% making the promissory note effectively a gift.
Legal Interpretation of a Gift vs Loan
But what constitutes a gift vs a loan? This is far beyond the scope of this post, but the case of Barber v. Magee, 2015 ONSC 8054 (Ont. S.C.J.) provides some clarity of the documentation required for a family transfer to be categorized as a loan. The characterization of whether funds advanced are a gift or loan are detailed in this law firm’s summary, "Inter Family Gifts vs. Inter Family Loans". As I understand this as a layperson, in this case the husband received $157,000 or so from his father which was used to purchase the matrimonial home and pay for other costs. The husband argued the $157k was a loan he still had to repay, and it would still form a liability and be deducted from his net family property.
The wife argued the funds were a gift and since the funds were used to purchase the matrimonial home, the husband had to record the house as an asset to be split as part of the family property.
The courts held the funds were a gift.
It was my intention in writing this post to:
1. Reflect the complexity of family law and the jurisprudence in respect of whether funds given to a child are a loan or gift
2. Urge you to consult a family lawyer before making a gift or loan to your child/ren to help in buying a house, since as the CIBC report reflects, 30% (likely rising even higher) intend or will be asked to assist our children in buying a starter or mover upper.
I hope I accomplished these objectives.
Bloggers Note: On my @bluntbeancountr Twitter account, a tax expert tweeted that the last couple times their clients wanted to reflect monies from the parents as loans for house down payments, the banks instead requested a written parental declaration that the funds transferred were a gift (this is related to the payment tests for CMHC and mortgaging) and they were unable to use a promissory note loan backed by a 2nd mortgage. You should discuss this upfront with your real estate and family lawyer and bank to see if this is problematic in your case.