Joan and her partner own the condo her son lives in, but they want to transfer ownership to him. What are the tax implications?
We purchased a condo for our son, who has been using it as his principal residence for over 10 years. He has made improvements, but the title is in our name. We would like to transfer the title to him, as he is now getting married.
How do we determine fair market value in a fluctuating market? He will not be paying real estate fees. Are we able to gift a portion? Is it better to spread capital gains over five years? We are both retired on a fixed income. Is rent-to-own a better way to transfer? — Joan
Claiming the principal residence exemption
When you transfer a capital asset like real estate to a family member, the transfer takes place at the asset’s fair market value, and capital gains tax is calculated accordingly.
In Canada, the principal residence exemption allows the sale or deemed sale of a qualifying home to be tax-free for a taxpayer. A transfer to a child would be considered a “deemed disposition” based on the property’s fair market value, meaning capital gains tax as high as 27% of the property appreciation could apply—that is, unless it could qualify as a principal residence.
In this case, Joan, the condo could qualify as your principal residence. The Canada Revenue Agency (CRA) states that one of the conditions of a principal residence is that it “must be ordinarily inhabited in the year by the taxpayer or by his or her spouse or common-law partner, former spouse or common-law partner, or child.”
So, you could claim the principal residence exemption to have the transfer to your son be tax-free to you. However, since you can only have one principal residence during a given year, you would also wipe out 10 years of the principal residence exemption for your own home. If you owned your home during the same 10-year period and you were to sell it after 20 years of ownership, for example, half of the appreciation would be taxable.
If the appreciation on the condo has been greater than the appreciation on your home, or if you would rather defer paying tax, you could elect to claim the principal residence exemption for the condo.
If you elect to pay the tax, note that capital expenses—which the CRA defines as providing “a lasting benefit or advantage”—would normally be added to the property’s adjusted cost base, which in turn reduces the capital gain. However, because the capital improvements were paid for by your son rather than you, they would not qualify.
Although you’re not required to get a formal valuation of the property for tax purposes, you might choose to get one. Canadian Residential Appraiser (CRA) is a designation granted by the Appraisal Institute of Canada. Its website has a tool for finding a local appraiser. You could also consult a realtor or estimate the property value on your own.
Our accounting and tax department is headed by Scott Page, BMath, MAcc, an experienced tax accountant with over 15 years of experience. Scott started his career in one of the big four accounting firms in Toronto. We also have other CPA tax accountants on our staff with a wide variety of experience gained at various Canadian accounting firms.
The tax implications of giving or selling a property to a child
Given that your son is getting married, Joan, I can appreciate your desire to transfer the property to him. Giving him the condo is a generous gesture, but keep in mind your son could take out a mortgage from a bank to buy the property from you in full or in part, or you could issue a mortgage to him.
For example, if the property’s value is $500,000, he could pay a down payment of as little as $25,000 and borrow the other $475,000 from the bank. Or you might choose to have him pay you $250,000, whether he borrows the funds or not, and give him the other $250,000 of value.
Gifts are not taxable in Canada, but whether your son pays you the property’s full value, a partial value or nothing, the transfer or sale is still deemed to take place at the fair market value. You cannot use an artificially low value to reduce or avoid the capital gains tax.
If your intention is to gift the full value to your son, there could be a benefit to taking back a mortgage for the full fair market value. In other words, you could transfer a $500,000 condo to him and register a $500,000 mortgage at 0% interest. This could provide a degree of family law protection in the event that he and his spouse were to separate or divorce.
Does transferring a property over several years reduce taxes?
As for your question about transferring the property to your son over five years, Joan, the answer is: it depends. This could help to split the capital gain over five years, but it may or may not reduce the amount of tax owing. It really depends on your income and your spouse’s income. In particular, if you are receiving Old Age Security (OAS) and the incremental capital gains income causes your OAS to be clawed back because your income level has risen, it may be better to have a clawback in a single year instead of multiple years. A tax professional may be best to help you determine your approach.
I do not think there is a rent-to-own angle here, Joan. However your son comes to own the condo, the capital gains tax will be the same.
A consideration for other readers who are thinking about buying a home for their children is to possibly have the property purchase take place in their names instead of yours. This will allow them to claim the principal residence exemption without affecting your ability to do so, as well as potentially qualify for GST rebates, land transfer tax refunds and the home buyer’s amount tax credit. There may be situations when buying in your name is preferable, so this needs to be weighed against the potential tax-saving opportunities.
