Given the current trajectory of Ontario’s housing prices in 2024, it is not uncommon for parents to financially assist their adult children in the purchase of a home.
In fact, it has now become the norm for parents to be financially involved in the purchase of their child’s home. A 2022 survey from the Ontario Real Estate Association identified that around 40% of young home purchasers received financial assistance from their parents.
Such financial assistance most commonly exists in the form of either a large advancement of money, averaging $73,605, or, as a co-signature on a loan for a down payment averaging $40,878. These loans often come in the form of lines of credit opened in the name of the parents.
This practice, although significantly helpful for the adult child, is often not as simple as transfer of funds from the parent’s account to the child. In fact, there are several issues which may arise from a parent financially assisting their adult children.
For example, if the assistance was initially by way of gratuitous transfer, but the parents later declare that they expect repayment, what criteria must be examined to determine whether the advancement was a gift or a loan?
Additionally, suppose a line of credit was opened in the name of the parents, in order for the adult child to procure a down payment. In this scenario who would ultimately be responsible for the monthly interest payments? What should be the nature and terms of the agreement between the parents and the child? How could the parents ensure that the child was responsible for paying the principle of the loan?
Finally, what are the parent’s rights with respect to the property? Should the parents be granted an equitable interest in the house? If the home, which was purchased with the assistance of the parents, was the matrimonial home of the child and their spouse, how should the loan be dealt with, if the child and the spouse get a divorce? Who would be responsible for ensuring that the loan was repaid?
Unfortunately, these questions and considerations are often only raised when an issue arises; often years after, when the gratuitous transfer was initially made.
In order to prevent these issues from arising, many banks now require the parents to sign documents explicitly stating that the financial assistance is by way of gift and not by loan. However, these documents often cannot overcome a meeting of the minds between the parents and the child.
These issues often result in strained and broken family relationships, and a litany of court cases centered squarely around the contractual rights and obligations which come with the purchase of the home.
The Case Law
Many of these concerns were addressed in the 2007 Supreme Court Case of Pecore v. Pecore. A brief overview of the facts are as follows:
A husband and wife were going through divorce proceedings. Prior to their divorce, the wife’s father had transferred to her account many assets (cash and other) for tax purposes. The father continued to control the assets after putting them in her name. The wife was allowed to make some withdrawals from the account for personal use with the permission of her father. The father argued that these transfers ought to be considered loans. On the contrary, the husband argued that these transfers ought to be considered gifts.
Upon divorce, the issue at trial was whether the husband was entitled to a portion of these assets in the equalization process.
At trial, the Superior Court held that the evidence failed to rebut the presumption of advancement and held that the money in the accounts belonged to the wife. The judge held that the evidence clearly indicated that the father intended to gift the money to his daughter while only maintaining control of it for her benefit. As such, the husband would be entitled to a portion of these assets in equalization.
On appeal, the Court of Appeal agreed that there was ample evidence to show the father intended to gift the assets to the wife. This decision was subsequently appealed to the Supreme Court of Canada.
At the Supreme Court, the Court refined the general test to be as follows:
Step 1: General Presumption (No Special Relationship Between Transferor and Transferee)
In general, the law presumes bargains, not gifts. Therefore, if the transfer is between two parties with no special relationship, the presumption is that it is a loan and not a gift.
The onus is then on the person alleging a gift to establish that the transfer was intended on being a gift.
Step 2: Presumption of Resulting Trust (Relationship of Parent to Child (inclusive of children in-law))
Where the relationship is that of parents to children, the presumption is that of a resulting trust and that the children hold the property for the benefit of the parent.
Step 3: Presumption of Advancement (Where Parent has Financial Obligations)
The court may replace the presumption of resulting trust with a presumption of advancement, or gift, if the parent was obligated to provide for the child
For example, where the child is not an adult, or is a dependent adult.
If there is no financial obligation, then this presumption does not apply, and the analysis proceeds with the presumption of resulting trust.
Step 4: Rebutting the Presumption
Once a presumption is established, it can be rebutted by the transferee if they can present clear and cogent evidence that the transfer was intended to be a gift.
They must show the following:
- The transfer was intended to be a gift.
- The child accepted the gift.
- A sufficient act of delivery or transfer of the property occurred to complete the transaction.
Protecting the Bank of Mom and Dad
In the end, the important take away is that parents must be careful when agreeing to financially assist their adult children in the purchase of their home. The Bank of Mom and Dad ought to take the proper precautions to ensure not only that the legal arrangement is clearly defined, but also that their life interests are sufficiently protected. It is highly recommended that the Bank of Mom and Dad consult a lawyer prior to entering into any such agreements with their children.
Ontario’s real estate market is dynamic, presenting opportunities and challenges for both buyers and sellers. Understanding the legal landscape of real estate transactions is crucial to ensure a smooth process and avoid potential pitfalls. In this blog post, we’ll explore key aspects of Ontario real estate law that every buyer and seller should be aware of, from understanding agreements to navigating disclosures and closing processes.
Key Aspects of Ontario Real Estate Law
1. The Agreement of Purchase and Sale
The Agreement of Purchase and Sale (APS) is a critical document in Ontario real estate transactions. It outlines the terms of the sale, including the purchase price, deposit amount, closing date, and any conditions. Key considerations include:
- Condition Clauses: Common conditions include financing, home inspections, and the sale of the buyer’s current home. These conditions must be satisfied or waived within the specified time frame.
- Deposit: Typically, a deposit is required to secure the purchase. This amount is held in trust until closing and is applied toward the purchase price.
- Fixtures and Chattels: Clearly define what is included in the sale. Fixtures (e.g., built-in appliances) are included, while chattels (e.g., personal items) are not unless specifically listed in the APS.
2. Disclosure Requirements
Sellers in Ontario are obligated to provide certain disclosures to potential buyers. These disclosures include:
- Property Condition: Sellers must disclose known defects that are not generally discoverable by a prospective purchaser on a reasonable inspection and ordinary vigilance, which could reasonably render the property uninhabitable. This can include issues such as faulty electrical wiring hiding behind the walls or a well-hidden termite or mold problem.
- Title Issues: Sellers must ensure that the title to the property is clear and free of any encumbrances or legal claims, subject to the provisions of the APS.
3. Due Diligence and Inspections
Buyers should conduct due diligence to protect their interests:
- Home Inspections: It’s advisable to arrange for a professional home inspection to identify any potential issues with the property. This can help prevent unpleasant surprises after the purchase.
- Title Search: A title search is essential to confirm that the property’s title is clear and that there are no outstanding claims or encumbrances.
4. Closing Process
The closing process involves several critical steps, including:
- Reviewing the Statement of Adjustments: This document outlines the final financial details of the transaction, including adjustments for property taxes, utilities, and other costs.
- Finalizing Financing: Ensure that your mortgage financing is in place and that all conditions have been met.
- Transferring Ownership: The transfer of ownership is formalized through the registration of the property deed with the local Land Registry Office. This step is typically handled by your lawyer.
5. Role of Legal Professionals
In Ontario, legal professionals play a crucial role in real estate transactions:
- Real Estate Lawyer: A lawyer ensures that all legal aspects of the transaction are handled correctly, including reviewing the APS, conducting title searches, and managing the closing process.
- Realtor: A licensed realtor can guide you through the buying or selling process, provide market insights, and help with negotiations.
6. Tax Considerations
Real estate transactions in Ontario come with tax implications that should be considered:
- Land Transfer Tax: This tax is payable by the buyer and is calculated based on the purchase price of the property. There are certain exemptions and rebates that may be available.
- Capital Gains Tax: For sellers, capital gains tax may apply to the profit from the sale of a property that is not considered a principal residence.
7. Current Market Trends and Legal Considerations
Ontario’s real estate market is influenced by various factors, including economic conditions, government policies, and local market trends. Staying informed about current market conditions can help you make better decisions and understand the legal implications of your transaction.
Conclusion
Navigating Ontario real estate law can be complex, but understanding the key aspects of real estate transactions, from agreements and disclosures to the closing process and tax considerations, is essential for a successful experience. Whether you’re buying or selling a property, consulting with experienced legal and real estate professionals can provide valuable guidance and ensure that your transaction proceeds smoothly.