A GIFT OF LAND – AND TAXES?  

When you own real estate, it is common to ask what the tax implications are when adding or removing ownership interests to your property. These questions arise mostly in the context of spouses, unmarried couples, or transfers to family members, such as children or grandchildren. While every situation is unique and requires oversight from a tax professional, this article explores some of the common pitfalls and opportunities that arise when affecting ownership of real property.  

There are three kinds of tax this article will consider. First, there is Land Transfer Tax (LTT), which is the tax paid based on the value of the consideration for the property. Consideration means the sum of money that has changed hands, as well as the value of any mortgage or debt assumed by the person who acquired the interest. Let’s look at a common example - adding a spouse to title. In this situation, there would be no money changing hands. The consideration is nominal, and the transfer is recorded as an “Inter-spousal transfer for natural love and affection”. Yet if there is a mortgage, every additional owner must assume their share of the secured debt by default. In our situation, the consideration would then be noted as ½ the value of the outstanding mortgage.  

Thankfully, there is an exemption available to transfers between spouses which avoids LTT. This exemption reads that “the only consideration passing is the assumption of any encumbrance registered against the lands” and could result in savings of several thousand dollars. Yet unmarried couples must be cautions. The exemption is only available to spouses as defined by section 29 of the Family Law Act. To qualify as a spouse under the Act, you must have cohabited continuously for a period of not less than three (3) years or are in a relationship of some permanence, if you are the natural or adoptive parents of a child. This means that if you are not spouses, then the property must be owned free and clear of encumbrances or you are refinancing of the property in order to avoid LTT. On a final note, adding someone to title when there is an existing mortgage or secured debt requires the consent of the existing creditor, so be sure to discuss your situation thoroughly with your trusted legal professional.  

The second kind of tax we will consider is capital gains (CG). Although a principal residence can be sold or transferred without incurring taxes, when you transfer or add owners to second homes or cottages, the question of CG must be discussed. Let’s assume that an owner of a cottage passes away without a surviving spouse. Here, 50% of the cottage’s increase in value is subject to taxation payable by the estate. Unfortunately, if there isn’t enough money available to the estate to pay the tax, the cottage may have to be sold to pay the tax. Under the right circumstances, one option is to transfer ownership to your children during your lifetime. While this not only avoids estate tax (discussed further below), the main benefit is that any gains accrued following the transfer are taxed on the children when they transfer or sell the cottage. The downside is that a taxable capital gain is triggered in the current tax year for the owner. The amount of CG is based on the cottage’s fair market value, even if it is gifted. This immediate tax consequence to owners for transfers on second properties and cottages can make this option less attractive. It is important to emphasize that minimizing the impact of capital gains takes careful planning and professional advice, as there are a variety of options, including insurance policies, available to you. These various options cannot be covered in the limited space of this article.  

The last kind of tax we will consider is the Estate Administration Tax (EAT). When you pass away, your estate pays a fee of 1.5% on every dollar of the value of the estate after $50,000 when applying for probate. However, if property is owned jointly, your interest is transferred to the surviving owner directly without going into the estate. This means EAT is not payable. Adding someone as a joint tenant such as a child may seem like a good idea to avoid EAT, but there are many pitfalls and traps in this approach. Let’s consider a situation involving a primary residence. Here, a parent adds one of their children as a joint tenant to their home intending to avoid EAT. However, the parent expects the property to be sold on their death and the proceeds distributed according to their will. In this situation, the child is really a trustee for the estate. This means that if probate is required for the estate in dealing with any other assets, then the value of the home must be included in the application, and the EAT is payable. Other challenges arise when adding a child as a joint tenant. It can expose the home to the child’s creditors. It can also lead to disputes with the owner’s other children, unless the intent of adding the child to title is well documented. Last, it can expose the child to CG when they ultimately go to sell the property. These considerations mean the expected benefits of saving on EAT can be outweighed in many situations.  

Every client’s circumstance is unique and there are tax and non-tax considerations. So, if you are thinking of gifting property, be sure to contact Liddiard Law today so you can receive professional guidance from a trusted legal professional.  

Michael Craig Liddiard, BA MA JD | Liddiard Law Professional Corporation | michael@liddiardlaw.ca