What is a life estate and when would I use one for Ontario property?

A life estate is a form of property ownership where one person (the life tenant) has the right to use and occupy the property for the duration of their life, and another person (the remainderman) holds the residual interest that becomes theirs outright when the life tenant dies.

Life estates are sometimes used by parents who want to transfer a home or cottage to their children now — to avoid probate, simplify the estate, or address tax planning — while retaining the right to live in the property for the rest of their lives. The parent becomes the life tenant; the child or children take the remainder interest.

From a tax perspective, creating a life estate is treated as a partial disposition for CRA purposes. The parent is deemed to have transferred the remainder interest at a portion of the fair market value, which may trigger capital gains tax. The life tenant retains the right to the income and use of the property, along with responsibility for maintenance costs and property taxes.

There are important practical risks. Once the life estate is created, the life tenant cannot sell or mortgage the full property without the remaindermen's consent. If the family relationship breaks down, the life tenant's right to remain is protected, but disputes about maintenance, expenses, or the property's use can become complicated.

Life estates require careful legal drafting and tax advice before implementation.