Well it certainly looks like the real estate market is rebounding. “Sold above asking” signs are beginning to pop-up again, to the delight of Canadian sellers and realtors, but much to the chagrin of the Bank of Canada, and of course the first-time homebuyer.
We don’t know how long this rally will last, but today I want to talk about the people who are trying to get into the home ownership club for the first time. The first-time homebuyer. More specifically, if you want to help your child become a first-time homebuyer.
They have been watching the price of homes skyrocket here in Canada since the beginning of the pandemic. There was a twelve-month breather when prices fell, but they were falling from such stratospheric highs, that even the lows seemed somewhat out of reach to many.
That means that many first-time homebuyer children are turning to the bank of Mom and Dad to help them get the keys to their first home.
What is the best way to help your child (or grandchild) become a first-time homebuyer?
Whether you plan to give them money, lend them money or co-sign your child’s mortgage, some planning will be required to make the transaction as beneficial to your child, and with as little damage to your own retirement plan as possible.
Gift
When you decide to give your child money, there is typically no tax implications for the child, but you as the parent, need to be mindful of the possible tax consequences, depending on where or what accounts you are sourcing the funds from.
Loan
If you lend your child the money to purchase a home, there again may be no immediate tax consequences, but you do need to think about the source of the loan funds.
If you decide to lend them the money form your personal funds, you could choose to charge interest. That interest would then become taxable income at your highest marginal tax rate. The interest paid to you by your child is not tax-deductible to them, if the home is being purchased for personal use.
If you decide to lend them the money from your private holding company or business, the company will need to charge interest at the prescribed rate so that CRA does not consider the withdrawal a shareholder loan. In this case, it would be critically important to talk to your tax advisor.
Co-sign
There is also the co-signing path, where you as the parent co-sign your child’s mortgage. This allows your child to benefit from what might be a stronger credit position and could potentially secure them a lower interest rate and more credit.
Co-signing allows you to help your child without having to dig into your personal savings or investments, which avoids the tax implications related to selling your investments. It also may be preferable to both parties as the expectation is that your child still pays for their own home.
It is very important to be aware that co-signing a mortgage will mean that you are responsible to the lender (bank) if your child fails to make their payments. This would also affect your own credit rating. It could also affect your own ability to borrow money if you decided to buy a cottage or an investment property, for example.
Gifts or Loan Strategies
If you do decide to gift or lend funds to your child, which accounts should you pull the money from?
Ideally, making use of your cash and near-cash balances first, and then turn your focus to non-registered funds with a loss, or little to no gains. This will minimize the tax consequences.
You should then consider funds from your TFSA as the next best option. There are no tax implications from making TFSA withdrawals, but you will lose the tax-free growth on the withdrawn amount, until they can be deposited again.
Lastly, non-registered money with a capital gain is still a relatively good idea from a tax perspective. Capital gains is more efficient than interest from a tax perspective.
If you are thinking about using your RRSPs or your RRIFs, you should consider this option carefully. Both options are fully taxable at the highest marginal tax rate. You will also need to consider how the withdrawal will impact your own retirement situation.
Don’t endanger your own plan
No matter where you decide to pull the money from to help your child, it is very important to incorporate your gift or loan agreement into your cash-flow plan. You need to be absolutely sure that your decision to help your child with their first home does not compromise your own retirement plan or your lifestyle.
It is a good practice to think about any potential unforeseen or emergency expense that might arise, or the possibility that your other children will be looking for the same deal.
You will also want to consider what will happen to your funds in the even of a divorce, which can get tricky (especially for a wedding gift). Talking to a lawyer is recommended.
Estate Plan
As always in this space, you should consider the impact on your estate plan. Your gift to one child now could potentially impact your child’s share of your estate. You should document it thoroughly and include it in Your Estate Organizer.
The current housing market is getting harder and harder to access, especially for first time home buyers. Helping a child (or grandchild) to become a first-time homebuyer is a very common goal among many of my clients, but like all things, you will need to do a little homework. There is no “one best” solution. The impact it will have on your own finances is just as important as the impact it will have on your child’s fortunes.
If you would like to discuss your options regarding helping your child buy their first home, feel free to schedule a free call here: FREE 15-MINUTES
As always, I wish you health and happiness.
With Gratitude,
Kevin-Barry Henry.
THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE PERSONAL INVESTMENT OR LEGAL ADVICE. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.