Buying a Home From a Family Member Below Market Value in Ontario

Buying a home from a parent or other relative at a discount can help a family, but it is not a simple handshake deal. Taxes, your lender and the rest of the family can all be affected by how the sale is structured.

This article explains the main issues in Ontario: how land transfer tax is calculated, what can happen to the seller for income tax purposes, and what to check with a lender. Every family sale is different, so legal and tax advice before you sign is worth it.

Land transfer tax is not only about the price

Ontario land transfer tax is charged on the value of the consideration. That is not limited to the price in the agreement of purchase and sale: it can include the value of any liability assumed, such as a mortgage, and any benefit conferred. This matters for family sales below market value.

For example, if you pay a low cash price but also take over the seller's mortgage, the mortgage is part of what is measured. Toronto and some other municipalities may also charge their own tax, and the rules vary, so check the local position.

If you are a first-time buyer, the Ontario refund is up to $4,000 and requires that you are at least 18, have never owned an eligible home anywhere in the world, and occupy the home as your principal residence within nine months. For agreements signed after November 14, 2016, the refund is limited to Canadian citizens and permanent residents, and a buyer who is neither at closing has 18 months after registration to become one and then apply. The refund must be claimed within 18 months after registration. If your spouse has owned an eligible home while married to or in a spousal relationship with you, neither of you qualifies.

The seller's income tax problem

The seller may face a tax cost that surprises families. When someone sells or gifts property to a non-arm's-length person, such as a relative, for less than fair market value, paragraph 69(1)(b) of the Income Tax Act deems the seller to have received proceeds equal to fair market value.

In plain terms, a parent who sells for less may still be taxed as though they sold at full value. How this applies depends on the seller's situation, so the seller should speak to an accountant before agreeing on a price.

Transfers between spouses

If the buyer and seller are spouses, different rules may apply. Certain transfers of land between spouses, such as those under a separation agreement or court order, can be exempt from land transfer tax under Ontario's spousal-transfer rules.

On separation, the family home is also treated specially. The full value of the family home must be shared even if one spouse owned it before the marriage or received it as a gift or inheritance, unless the spouses agree otherwise. A marriage contract can exclude property, including the family home. Common-law partners are not required to divide property under the equalization rules, though a cohabitation agreement can set terms.

Lenders, down payments and co-ownership

Lenders generally want to understand the real value of the property and where your money comes from. A below-market price may lead a lender to rely on an appraisal rather than the price in your agreement, and its own requirements will apply. Ask early what documents and appraisal your lender needs.

A family gift can help with the down payment. CMHC lists a non-repayable financial gift from a relative as a traditional down payment source. For homes of $500,000 or less the minimum down payment is 5%. Keep a clear written record of any gift so no one later argues it was a loan.

If a relative will stay on title with you, how you hold it matters. On the death of a joint tenant, the surviving co-owners inherit the deceased's share, while a tenant-in-common's share becomes part of their estate. Co-owners may also agree to unequal shares.

What to do next

• Get an independent estimate of fair market value before agreeing on a price.
• List every part of the deal: cash, assumed mortgage, credits and anything else the seller is giving up.
• Ask the seller to talk to an accountant about the income tax result.
• Tell your lender early that the seller is a relative and ask what it needs.
• Document any gift in writing and consider how other family members may be affected.
• Have a lawyer prepare or review the agreement and the land transfer tax filing.

Frequently asked questions