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

Giving your home or a second property to your adult child can feel simple: you sign it over and nothing is paid. In practice, two different tax systems look at the transfer, and neither one cares much that no money changed hands.

This article covers an outright gift of the whole property from a parent to an adult child. It explains land transfer tax, then income tax, then how the transfer is registered. Adding a child to title alongside you is a different question that depends on the facts, so it is not covered here.

Two separate tax questions

Land transfer tax is a provincial tax charged when land changes hands in Ontario. Capital gains tax is part of federal income tax and is based on the increase in the property's value while you owned it. They are calculated separately, by different rules, and you can owe one, both or neither.

Ontario's land transfer tax is normally calculated on the value of the consideration, meaning the amount paid for the land, including liabilities the transferee assumes such as a mortgage. Income tax works differently, because it can treat a gift as if it were a sale.

Land transfer tax on a gift

The Land Transfer Tax Act has no general exemption for gifts of land. If no consideration of any kind passes, though, no tax is payable because the tax is calculated on a nil value.

The word "consideration" is wider than cash. The Act defines the value of the consideration as the gross sale price plus any benefit of whatever kind conferred as part of the arrangement. That is why the details of the deal matter.

When tax is payable, the provincial rates are 0.5% up to $55,000, 1.0% from $55,000 to $250,000, 1.5% from $250,000 to $400,000, and 2.0% over $400,000, with 2.5% over $2,000,000 where the land contains one or two single family residences. These apply to agreements after November 14, 2016, registered on or after January 1, 2017. Toronto also charges its own municipal land transfer tax on top of the provincial tax, so ask about that if the property is there.

Do not understate the arrangement

It can be tempting to describe a deal as a gift when it is really a discounted sale or involves a mortgage. The Act pushes back on this in several ways.

• Making false or deceptive statements, such as understating the price, is an offence. The fine is at least the greater of $1,000 or 50% of the tax that should have been paid, up to twice that tax, and a court can also impose up to two years in prison.
• 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.
• A general anti-avoidance rule lets tax consequences be set as is reasonable to deny the tax benefit of an avoidance transaction.

Capital gains when a parent gifts property

For income tax, a gift is not treated as free. A person who gifts property, or transfers it to a non-arm's-length person for less than fair market value, is deemed to have received proceeds equal to fair market value. When a home is gifted to a child, that can trigger a capital gain.

Your child is treated the other way around. A person who receives property by gift, bequest or inheritance is deemed to acquire it at fair market value. Practically, that means the child's starting value for future tax purposes is the market value at the time of the gift, not your original purchase price.

If the property was your principal residence, you may be able to shelter the gain. When 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 principal residence exemption. A second property such as a cottage or rental is usually a different story, so an accountant can confirm how much gain, if any, would be taxable.

Transfers to a spouse follow a different rule. 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, although the transferor can elect out on their return. That rollover does not apply to a gift to a child.

How the transfer is registered

Ontario's land registry is online only. Documents are registered electronically through Teraview by authorized account holders. Authorization to register land documents electronically is free to apply for, and applicants must provide 2 pieces of identification to guard against identity theft and real estate fraud. Who would handle the registration for your transfer is worth confirming with a lawyer.

ServiceOntario reviews and certifies registrations but cannot search, give legal advice or explain any property's records. Anyone can search, view and download current and historical property records, such as a parcel register, through OnLand for a fee. After the transfer is registered, you can use that search to confirm your child now appears as owner.

What to do next

• Find out whether any mortgage or other debt is registered against the property, and whether your child would take it on.
• List anything your child is giving in return, even if it seems small, and describe the transfer accurately.
• Ask an accountant to estimate the capital gain and whether the principal residence exemption covers it.
• Remember that the Schedule 3 designation is made when you report the deemed sale on your return.
• Check land transfer tax rates, exemptions and refunds again before you sign, since tax rules can change and how they apply depends on your situation.
• Speak with a real estate lawyer before signing, and ask about any municipal land transfer tax.

Frequently asked questions