April 18th 2022
For financing reasons, a parent may decide to go on title to land that a child owns or is looking to purchase. There are a few considerations when adding a parent to title. This article gives a brief overview of those considerations and provides the reader with some questions that they might ask before agreeing to go on title.
The first issue is equity in the land. A parent may decide that they do not want any equity ownership in the land. In this situation, they are said to be a bare trustee. A trust agreement can be put in place to show that even though a parent is shown on title, they do not hold any beneficial ownership, and therefore are not entitled to the profits or control of ownership. In other situations, a parent may want a portion of the equity or control and use of the land. For instance, a parent who provides a substantial deposit may want profits on the sale or to obtain equity on the future refinance of the land. In this event, a parent must discuss with their child what a trust agreement or co-ownership agreement may look like. With a trust agreement, a parent may legally be shown on title for less than what their actual percentage right to profit is. For instance, a parent might be on title for 1%, although they are expecting ½ of the profit when the land sells. A parent might choose to go on title legally for 1% to maximize the first-time homebuyer exemption available to their child. The trust agreement would then stipulate what is to happen in the event of sale or refinance. This leads us to the second consideration of land transfer tax more generally.
Land transfer tax (LTT) can be reduced in two main ways. First, parents who are acting as bare trustees, meaning those who do not intend to have any equity in the property, have a trust agreement in place together with the necessary affidavits to allow the property to be transferred from beneficial owner to the trustee and appropriate selections made in the land registration software on closing. This option requires submission of the trust agreement to the Ministry together with the preparation of detailed affidavits. The risk is that if the Ministry rejects the contents of the application, then land transfer tax might still be owing. Also, the legal cost of the additional work for this option might outweigh the savings. A second and more common option is to reduce the ownership to 1% ownership for the new transferee (the parent) so that the amount of debt assumed is less. This is because it is the assumption of debt which confirms the LTT payable as consideration for the transfer. For instance, if only one parent is being added to title, then the value of the consideration will include one half of the principal balance and accrued interest still owing under the mortgage.
If you are considering being added to title for financing reasons, be sure to reach Liddiard Law today.
Michael Craig Liddiard, BA MA JD