Gifting Your House to Your Child in Ontario: Capital Gains and Land Transfer Tax

Many parents think about handing their home to an adult child, whether to help them get started or to simplify things later. It can feel like a simple family decision, but the tax rules treat a gift very differently from what you might expect.

This article explains the main income tax and Ontario land transfer tax points in plain language. Every situation turns on its own facts, so it is worth confirming your plan with a lawyer and an accountant before you sign anything.

The income tax rule: a gift is treated as a sale

Under Income Tax Act s. 69(1)(b), if you gift property, or transfer it to a person you are not at arm's length with for less than fair market value, you are deemed to have received proceeds equal to fair market value. That can trigger a capital gain when a home is gifted to a child.

The child is treated the other way around. Under s. 69(1)(c), a person who receives property by gift, bequest or inheritance is deemed to acquire it at fair market value. That becomes the starting point for any gain your child has when they later sell.

How the principal residence exemption may help

If the home was your principal residence, the principal residence exemption may offset the gain. If you sell, or are considered to have sold, a home that was your principal residence, you must report the sale and designate the property on Schedule 3 to claim the exemption.

Because a gift is treated as a sale, the reporting requirement is part of the picture even though you received no money. Whether the exemption covers the whole gain depends on the facts, such as whether the home was always your principal residence. An accountant can confirm this.

Spouses are treated differently

Transfers to a spouse or common-law partner follow a different rule. Under Income Tax Act s. 73(1), capital property transferred to a spouse or common-law partner, where both are resident in Canada, is generally deemed transferred at cost, so no gain arises immediately. The transferor can elect out on their return.

That rollover does not extend to a child. A gift to a child is generally dealt with under the fair market value rule above.

Ontario land transfer tax on a gift

Land transfer tax is normally calculated on the value of the consideration, meaning the amount paid for the land, including liabilities the person receiving it assumes, such as a mortgage. The Act defines this broadly as the gross sale price plus any benefit of any kind conferred as part of the arrangement.

Ontario's Land Transfer Tax Act has no general exemption for gifts of land. However, if no consideration of any kind passes, no tax is payable because the tax is calculated on a nil value.

The exception is a mortgage. When land is gifted subject to a mortgage the recipient takes on, land transfer tax is payable on the amount owing at registration, whatever the relationship between the parties. The provincial rates are set out below.

Registering the transfer and staying onside

Land documents are registered electronically through Teraview by authorized account holders.

Be accurate about what is being paid. Making false or deceptive statements, for example understating the price, is an offence under Land Transfer Tax Act s. 6, with a fine of at least the greater of $1,000 or 50% of the tax that should have been paid, up to twice that tax, and possible imprisonment of up to two years. Where unpaid tax results from fraud or wilful default, the Minister may assess a penalty of the greater of $500 and 25% of the unpaid tax under s. 7.1(1).

Section 12.1 also contains a general anti-avoidance rule. If a transaction is an avoidance transaction, its tax consequences are set as is reasonable to deny the tax benefit.

What to do next

• Get a recent estimate of the home's fair market value.
• Confirm whether the home has been your principal residence throughout your ownership.
• Find out whether any mortgage will stay on the property and be taken on by your child.
• Ask an accountant how the gift will be reported on your return, including Schedule 3.
• Ask a lawyer to explain the land transfer tax position and to prepare and register the transfer.
• Be honest and complete about any payment or benefit in the transaction.

Other factors, such as a spouse's rights in a matrimonial home or a family arrangement, can affect your plan, so raise them early with your lawyer.

Frequently asked questions