Using Gift Money for a Down Payment on an Ontario Home

Many first-time buyers in Ontario get help from a parent or other relative with their down payment. That help can make the difference between buying now and waiting, but it also raises questions: what proof will a lender want, how will your lawyer treat the money, and how do you keep a gift from being seen as a loan?

This article explains the general picture. The exact documents depend on your lender and your lawyer, so treat it as a guide to the questions to ask.

Gift or loan: why the difference matters

A gift is money given with no expectation of repayment. A loan is money you are expected to pay back, even if the lender is your parent and there is no interest. The difference matters because a loan is a debt, and debts can affect how a lender looks at your finances.

CMHC lists a non-repayable financial gift from a relative among the traditional down payment sources for its homeowner mortgage loan insurance. The word that matters there is non-repayable. If the money is expected back, it is not a gift.

What a gift letter usually covers

Lenders often ask for a signed letter from the person giving the money. The exact wording and requirements vary by lender, so ask your mortgage professional or lender what they want before the giver signs anything. In general, a clear letter tends to address points like these:

• Who is giving the money and how they are related to you.
• The amount being given.
• A statement that the money is a gift and does not have to be repaid.
• A statement that no other person has a claim on the property because of the gift.
• Where the funds are coming from and when they will be transferred.

These are common practices, not a fixed legal list. Your lender and your lawyer may ask for more or something different.

How lenders and your lawyer treat the money

Lenders want to know that your down payment is real and where it came from. Your closing lawyer will also want to see that the funds are in place before closing. Expect to be asked for bank statements or other records showing the money moving into an account in your name or to your lawyer.

How much you need to put down also matters. The minimum down payment is 5% for homes of $500,000 or less, 5% of the first $500,000 plus 10% of the portion above $500,000 for homes from $500,000 to $1.5 million, and 20% for homes of $1.5 million or more. Below 20% down, you will typically need mortgage loan insurance. For CMHC homeowner mortgage loan insurance, the purchase price must be below $1,500,000.

Keeping a gift from being treated as a loan

• Have the giver sign a gift letter that states plainly the money does not have to be repaid.
• Do not sign a side agreement, text message or note promising to repay the money.
• Move the money early enough to leave a clear paper trail in the bank records.
• Be honest with your lender and lawyer about the source of the funds.
• If the giver actually wants the money back, treat it as a loan and tell your lender, since it may affect your borrowing.

If the arrangement is more complicated, for example the giver wants a share of the home or wants to be repaid when you sell, it may not be a simple gift. That is a good time to talk to a lawyer about whether to document it as a loan, a co-ownership or something else.

Related issues with family money

Gifts of cash are different from selling or transferring a property to family. Ontario land transfer tax is charged on the value of the consideration, which is not limited to the price in the agreement. It can include the value of any liability assumed, such as a mortgage, and any benefit conferred, which matters for family sales below market value.

On the income tax side, 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. If your family is considering a below-market sale rather than a cash gift, speak with a lawyer and an accountant first.

If you and a spouse separate, how property is divided depends on your relationship and any agreements you have signed, so family gifts used in a purchase are worth documenting clearly.

What to do next

• Tell your lender early that part of your down payment is a gift, and ask what documents they need.
• Ask your closing lawyer what they need to see and when.
• Have the giver confirm the amount and the timing of the transfer.
• Keep copies of everything, including the signed letter and bank records.

If the giver is not in Canada, if the amount is large, or if there is any expectation of repayment or an ownership stake, get legal advice before the money moves.

Frequently asked questions