Intergenerational Loans

Madchen V.J. Funk, associate

In a recent family law case of the Ontario Superior Court of Justice, the Court contended with an intergenerational loan. In Testani v Haughton (2019 ONSC 174), the wife’s mother had transferred a piece of property to the husband and wife; in exchange, the husband and wife paid the costs associated with the transfer and took on the outstanding mortgage.  After the transfer of the property, the wife executed a note which indicated that she would pay her mother $125,000.00 upon the mother’s request. The registered land transfer documents made no mention of the loan or note.

At trial, the wife claimed the loan to her mother as a debt which would be taken into account for equalization (i.e. the ordinary post-separation process by which assets and liabilities accumulated during a marriage are divided equally between the spouses). The husband challenged the validity of this debt, claiming that it was concocted after separation to provide a financial benefit to the wife during the family law proceeding.

The Court determined that the $125,000.00 debt would be discounted to $12,500.00 for the purposes of the equalization process, as it was unlikely that the wife would ever be required to repay the loan. The discount was applied, in part, because no demand for repayment was ever made until after the parties separated and because the wife did not tell anyone (including her bank, the real estate lawyer, or her husband!) about the note until after they separated.

This issue of the characterization of money advanced from parents to their children arises frequently in family law disputes at the time of the separation. The parents and their own child characterize the advances as loans to be repaid, while the son-in-law or daughter-in-law characterize the advances as gifts. Courts are often suspicious of transactions such as loans between family members which would credit one spouse during equalization, and will require proof of the nature of the dealing to allow such a credit.

The case outlined here suggests that such proof might include ensuring the loan is properly documented; disclosed consistently (to banks, real estate lawyers, family members, etc.); and likely to be called upon for repayment by the parent. These are important considerations to have in mind when gifting or loaning funds to your children.

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The lawyers at Giesbrecht, Griffin, Funk & Irvine LLP would be pleased to discuss intergenerational loans with you, and encourage you to contact their office in New Hamburg (519-662-2000) or Kitchener (519-579-4300). This advice is offered for information purposes only and may not cover all circumstances; please consult the lawyers at Giesbrecht, Griffin, Funk & Irvine LLP for advice tailored to your needs.

In Ontario, provincial Land Transfer Tax (LTT) is payable by anyone who acquires real property or a beneficial interest in land. The rule is that LTT is payable on the value given for obtaining such an interest (legally described as “consideration”). Consideration is generally the amount paid for the land and the amount of any debt or mortgage assumed as part of the purchase. 

As with many rules, there are exceptions to the application of LTT. I outline a few of them here:

First-time homebuyers are eligible for a refund of LTT. The conditions for eligibility are:

1. They are 18 years or older;
2. They have not owned a home or an interest in a home anywhere in the world; and
3. They have not been a spouse of someone who has owned a home or interest in a home anywhere in the world while s/he was the purchaser’s spouse.

For example: If Adam owns property and marries Ann, who has never owned a home, Ann does not meet the eligibility requirements for a LTT refund because she was the spouse of someone who has owned property.

It is important to note that the definition of “spouse” includes a) married couples, b) couples who have cohabited for more than 3 years, and c) couples who have lived together “in a relationship of some permanence” and have a child.

This definition of “spouse” also applies to the LTT exemption for transfers between spouses or former spouses, which are not subject to LTT if a) they are made pursuant to a court Order or a Separation Agreement or b) if the only consideration provided is the assumption of an encumbrance such as a mortgage. For example: If Blake owns property and wants his spouse, Barrie, to be added to title, Barrie will not pay LTT for obtaining an interest in Blake’s property so long as no value is changing hands aside from Barrie’s name being added to the existing mortgage.

Transfers from an estate to a beneficiary are not subject to LTT if the transferor is the personal representative of the deceased (i.e. Estate Trustee, Executor, or Estate Administrator) and the recipient is given the property in satisfaction of all or a part of his/her beneficial interest in the estate. This is true regardless of whether the transfer is pursuant to a will or on an intestacy.

If you are thinking of giving or acquiring an interest in land and would like to know if LTT is something you should budget for, please contact one of GGFI’s real estate lawyers who can help you navigate the eligibility requirements for these and other exceptions.

As tax season approaches, it is important to be aware of the changes made in the 2016 tax year. One of the notable changes implemented by Canada Revenue Agency is that relating to the principal residence tax exemption for gains made on the sale of real estate.

Starting with the 2016 tax year, individuals who sell their principal residence will be required to report basic information on their income tax return in order to claim the full principal residence exemption. This change may affect persons who sold their principal residence on or after January 1, 2016.

Previously, you did not have to report the sale of your principal residence to claim the exemption. The new rules for claiming the principal residence tax exemption require you to designate the property as your principal residence in your tax return for the year of the sale by filing the appropriate form. Please consult a tax professional in this regard, as this information is not to be construed as accounting or tax advice.

For more information, please visit the Canada Revenue Agency’s webpage Reporting the sale of your principal residence for individuals (other than trusts).