In today’s economy, it is increasingly common for parents to help their children purchase their first home. In fact, 35 per cent of first-time homebuyers in Canada received financial assistance from a relative for the purchase of their home in 2023. Parents help with the down payment and, in some cases, they help their children qualify for a mortgage. This support is a display of parents’ unconditional love for their children and their desire to help their children succeed. However, without proper planning, it can result in unforeseen and undesirable outcomes.

1. Family Law Considerations

The most common question I receive from clients is “I want to help my child purchase a family home, but how can I ensure that my gift is protected from divorce or separation?”

According to the Family Law Act, both spouses have an equal right to possession of a matrimonial home. This is the case even if only one spouse is on title to the home, either alone or together with a third party like a parent. Moreover, if funds from a parent or relative are put into a matrimonial home by a spouse, the spouse cannot exclude these funds from a calculation of their net family property upon a breakdown of the marriage.

One way to protect the gift is to structure it as a loan payable on demand. The parents can register the loan as a mortgage on title or keep a signed promissory note. Upon a breakdown of the marriage, parents can argue that the gift was a loan. They can demand that the loan be repaid and not included in the net family property. However, this solution is not perfect. Even though there may be documented proof of the loan, a court can look at the conduct of the parties and conclude that the advancement was truly a gift.

Even if the parties sign a promissory note, other loan document, or formally register a mortgage regarding the loan for the home, the best form of protection is for the child to enter into a marriage contract or cohabitation agreement with any current or future partner or spouse. These agreements allow the child and their spouse/partner to pre-establish the division of assets upon a relationship breakdown, including how the money from parents/relatives will be treated when it comes to property division.

There are also estate and trust considerations that spouses/couples should be aware of. It is important to document intentions and keep wills and agreements up to date.

2. Is it a Gift or a Loan?

When advancing such funds, it is also important to consider the intention of the donor. Is this a gift or is it a loan to be repaid?

Parents should ensure proper documentation is in place when assisting children with a down payment or mortgage for a home. If a loan is intended, supporting documentation should be prepared, such as a promissory note or a loan agreement, which includes a repayment schedule, provisions for interest and the applicable rate.

In some cases, parents may wish to register their interest on title to the child’s home to secure their interest. However, to qualify for a mortgage, it’s important to note that as a condition for their financing, the banks often require the person advancing the funds for the down payment to sign a deed of gift stating that the gift is not a loan. This may limit a parent’s ability in documenting the loan.

Courts are reluctant to identify an advance from parents/relatives as a loan unless there is proof that there is a promissory note or loan document prepared contemporaneously with the purchase of the home. Therefore, without a formal document in place, it is likely that any money given towards a home will be treated as a gift.

This distinction is not only important for Family Law Act protections but also for estate planning considerations. We are seeing a rise in litigation disputes relating to this very question on the death of a parent. The sibling who received the funds argues it is a gift, while the other siblings argue it is a loan to be repaid to the estate. It is important that intentions be documented properly at the outset.

3. Advances on Inheritance

If the contribution is a gift as an advance on inheritance, careful planning is key. Speak to your lawyer about clauses to include in your will to ensure that all children end up receiving equal amounts from your estate. It is important to draft these clauses carefully and clearly to prevent confusion and further disputes.

In the realm of millennial homeownership, financial assistance from a parent or grandparent is often necessary. While underscored by good intentions, this kind gesture can lead to several potential pitfalls, especially in the turbulent waters of sibling rivalries and marital breakdowns. Proper planning is the key to ensuring you leave a legacy for your loved ones and not a legal battle.

The information provided is general in nature. It does not constitute legal or financial advice and should not be relied upon as a substitute for professional advice.