Successfully passing on the family home

[AUDIO LOGO] One of the biggest decisions for parents is when and how to pass their homes on to their children. Here to answer these important questions is Pierre Létourneau, Vice President, High Net Wealth Planner at TD Wealth. Pierre, great to have you with us. Let's jump right in. What are some of the most common questions you get when it comes to this issue? Thanks Greg. Thanks for having me. I guess when it comes to the family home, a lot of times clients aren't necessarily concerned about income tax, because we're all familiar with the principal residence exemption. But in some provinces, they are concerned with probate fees, which is another form of taxes. Now, that tax varies from province to province, so it's not every province that has this issue. But for the ones where there are probate fees, it could be a significant amount. So clients are concerned with that. And the question I get most often is, well, should I, or when should I add my children on title to my family home? Is that a smart move? And if so, at what point in time does it make sense to do that? GREG BONNELL: All right. So let's dig into that. What point of time does it make sense to do that? What are some of the complications that can arise? Yeah, there's quite a few complications. And in fact, most of the complications, sometimes it could just offset the benefits. So we know the benefits are potentially avoiding probate, and it's much simpler to transfer an asset like that by having a joint owner and having your children on title. But some of the complications are that you may create a larger tax issue, a capital gains tax issue, because as you add your children as joint owners of the property, they may have their own principal residence. So this property is now a secondary property for them. So if there's any appreciation in the value of the property, there is going to be tax ramifications for them when the property is eventually sold. So we know that tax rates on income tax rates are much higher than probate rates. So that problem could become much bigger very quickly. Secondary, the second issue that comes up or is more of a practical issue, when you're adding your children on as on title of your home, you're now exposing that asset to their potential creditors. So that could be a financial institution or an individual that has loan funds to them. It could be a former spouse if they're going through a divorce, or if they're involved in a lawsuit and there's an obligation to pay a certain amount, any creditors could potentially have access or at least to request that the home is sold to fund any of those obligations. GREG BONNELL: So those are important considerations, obviously. What about in a situation where both parents have their names on the home, but one passes before the other? Does that introduce complications to the scenario? Normally, it doesn't because most spouses would hold the property jointly with right of survivorship. And so that's a key concept because if joint owners are holding the property with right of survivorship, when one person passes away, their interest in the property automatically passes on to the surviving owner and therefore bypasses the estate of the deceased spouse. And so it doesn't attract any probate fees. Where there can be a complication is if instead of holding it as joint tenants, the property is held as tenants in common. So it's another type of structure. We don't typically see that with spouses. But in that situation, there's no right of survivorship. So when one person passes away, their ownership interest in the property passes through their estate and then attracts probate. We mostly see this type of structure where maybe siblings are holding a property together, or business partners. They're likely to want their ownership interest to go to their spouse or their children or other beneficiaries. So they want their ownership interest to go through the estate. GREG BONNELL: Sometimes, Pierre, I'll hear people raise the issue saying, well, I'll simply just sell the property or gift the property to my children. Is it as simple as that? What do you need to be aware of there? Yeah, so that can be done. Now, obviously, when you're doing that, legally the property is now in their hands, so they're free to do what they want with that property. So obviously, hopefully, you've got other accommodations, and you're not relying on that property, or perhaps, you can maybe have a life interest in the property that should be part of that transaction. Now, there is a difference between selling and gifting. And that may depend on the province that you're in. But one of the considerations are family law considerations. A gift, it can be dealt with or can provide some protection if there's a breakdown in marriage after the gift, whereas that protection may not be there on a sale. There's also land transfer tax to consider as well too, particularly for Ontario. In Ontario, land transfer tax is based on the value of the consideration that's received for the transfer of the property. So if you're gifting an asset, there's no consideration going the other way. So there's no land transfer tax in that situation. If you're selling the asset though, there is consideration, because you're selling it for a certain price. And so that will lead to land transfer tax in Ontario. Pierre, I've only got a minute left with you, but I still got a lot of questions. But we'll get this one in. Obviously, we talk a lot about the principal residence exemption in this country. What some people may not know is you can sort of choose if you have multiple properties, maybe the cottage can become a principal residence. Yes, it can, as long as you're meeting the requirements, or "ordinarily inhabiting the property" is the term that's being used. And that threshold can be met if you're using the property while on vacation, on weekends. So yeah, there are many individuals in Canada that maybe have multiple properties that could meet the test. And the one caveat though is you can only designate one property for any given year as your principal residence. So for a lot of clients that we work with, it becomes a mathematical game trying to figure out which property has appreciated the most to determine which one you want to use your exemption on. The other factor you may want to consider is timing of sale if you're selling a property. If you have two properties that have the same amount of gains, but you're selling one now, and you plan on holding on the other one for another 15 to 20 years, you may want to use your exemption now, and pass on the tax bill to when you sell that second property. So that's another consideration. GREG BONNELL: A lot of great insights there, Pierre. Thanks for your time today. Thank you. Thanks for having me. [AUDIO LOGO]

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