This month’s blog post was co-written by Daniel Stober, Partner, and Nikita Mathew, Associate, at Torkin Manes LLP.
Over the past decade, it has become increasingly common for Canadians to provide financial assistance to family members to help with the purchase of a first home. A recent survey revealed that 35% of first-time homebuyers in Canada received financial assistance from a relative with the purchase of their home[1] .
Before providing financial assistance to a loved one to help with the purchase of a home, however, it is critical to consider the family and estate law implications of such assistance.
In Ontario, the Family Law Act (“FLA”) sets out the process by which property is divided between married spouses upon separation, which is known as the “equalization” regime. In essence, on separation, the spouses will each calculate their respective “net family property”, which is the increase in the value of the spouses’ assets and debts from the date of marriage to the date of separation. Absent an agreement between the spouses to the contrary, on separation, the spouse with the higher net family property figure will owe the other spouse a payment that is equal to half the difference between the two net family property figures (known as an “equalization payment”).
In the event of a spouse’s death during marriage, the surviving spouse may choose to either take the “equalization payment” in the same manner as on separation, or take what is provided for the surviving spouse under the deceased spouse’s Will.
The FLA does provide some special protection to gifts given to a child during their marriage. The equalization regime typically allows traceable gifts to be excluded from the calculation of net family property. However, as soon as a gift is used to purchase, maintain, or improve a matrimonial home, it loses its special status and the value of the gift will be shared equally between the child and their spouse upon a separation, or, potentially, upon the death of one spouse.
Even in the case of unmarried spouses, if a child is living with their partner in the home a parent helped them purchase, there is a risk that their partner could make a trust claim to share in the value of the home upon separation.
Accordingly, without proper planning, the funds you provide to a loved one to help with the purchase of a home could be shared with the loved one’s spouse on separation or death.
One way to protect the funds provided to a child for the purchase of a matrimonial home during a marriage is for the funds to be loaned rather than gifted. This changes the way the sum of money is treated under the FLA, making it a debt to be repaid to the parent. If funds are to be loaned for the purchase of a home, it is imperative that the loan be properly documented. This can be done, for example, through a promissory note that outlines a repayment plan, security for the loan, expectations for repayment and other similar details. However, the best protection to ensure that a child retains the entirety of a parent’s gift towards a home is for the child and their partner to enter into a cohabitation agreement or a marriage contract (colloquially known as a “pre-nup”). This type of agreement can set out the child and their partner’s explicit intentions as to how to deal with their home upon a separation, including how a parent’s gift should be treated. A properly drafted cohabitation agreement or marriage contract can exclude a gift used for a matrimonial home from equalization on separation or death.
From an estates perspective, it is important to consider the effect of a gift or loan to one child on the overall estate plan. For example, if the parents have two children and their overall plan is to treat the children equally, a gift or loan to one child, or gifts or loans in unequal amounts between the children, must be accounted for in the parents’ Wills in order to achieve equality between the children.
Despite the recent uncertainty in Ontario’s real estate market, it seems likely that assistance from family members will continue to be a key support to young people purchasing homes. It is important that legal advice be sought before any financial assistance is provided to ensure that your legacy is protected.
[1] https://financialpost.com/real-estate/first-time-homebuyers-worried-afford-down-payments
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