Life Estates in Ontario: How They Work and When They Are Used

A life estate is sometimes suggested as a way for a parent to give a home to a child while still living in it. You may be offered one, or you may be the person who would be left waiting for the property. Either way, it is worth understanding what you would be giving up or getting.

This article explains the idea in plain words and then looks at the tax, family law and estate rules that tend to matter. Because the exact rights depend on the wording of the documents, a lawyer should read them before you commit.

What a life estate means

People use the term life estate for an arrangement that divides rights in a home across time. One person, often called the life tenant, has rights tied to their own lifetime, and what those rights include depends on how the arrangement is set up. When the life tenant dies, the property goes to another person, often called the remainder owner. Ownership is divided across time instead of between two people living there together.

Who pays for taxes, repairs and insurance, whether the life tenant can rent the home out, and what happens if the home is sold are matters that depend on the documents. They should not be left to assumption. A lawyer can help set them out.

• Life tenant: lives in or uses the property, usually for life.
• Remainder owner: becomes the owner after the life tenant's death.
• Both: should agree in writing who pays what and what each can do.

Taxes when a life estate is created

Ontario's 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. 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.

For income tax, 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, which can trigger a capital gain when a home is gifted to a child. The person receiving property by gift is deemed to acquire it at fair market value. If the home was your principal residence, you must report the sale or deemed sale and designate the property to claim the exemption.

How a life estate is valued for tax is a question for an accountant. Transfers to a spouse or common-law partner who is resident in Canada are generally deemed to happen at cost, though the transferor can elect out.

Family law and the matrimonial home

If the home is a matrimonial home, both spouses have an equal right to possession whoever is on title. No spouse may dispose of or encumber an interest in it unless the other spouse joins in or consents, has released their rights in a separation agreement, or a court order authorizes it. A transaction that breaks this rule may be set aside.

On marriage breakdown, the full value of the family home must be shared even if one spouse received it as a gift or inheritance. A matrimonial home is property a spouse has an interest in that the spouses ordinarily occupy as their family residence, or did at separation. Whether a particular property counts depends on the facts, so it is worth confirming with a lawyer. The matrimonial home rules apply to married couples; common-law couples are not legally required to split property acquired while living together, though a partner who contributed may have a claim.

Drawbacks to weigh

• Spousal consent: if the home is a matrimonial home, no spouse may sell or mortgage an interest in it unless the other spouse joins in or consents, has released their rights in a separation agreement, or a court order authorizes it.
• Disagreements: co-owners and others with an interest in Ontario land may be compelled to make or suffer partition or sale, and any person interested may apply to court.
• Tax surprises: gifting can trigger a capital gain, and a mortgage taken on can trigger land transfer tax.
• Capacity: if the life tenant becomes incapable, an attorney under a continuing power of attorney for property may deal with the grantor's property, including selling a house, but gifts or loans to relatives are allowed only if there is reason to believe from intentions expressed before incapacity that the person would make them.
• Estate planning: an estate normally must be probated if the deceased owned real property that does not pass by right of survivorship.

Title insurance is optional and generally excludes defects the buyer knew about. Ask whether any policy would respond to a life estate arrangement.

What to do next

• List your goals: staying in the home, avoiding sale, helping a child, or reducing tax.
• Ask whether a mortgage, a spouse, or a creditor affects the property.
• Talk to an accountant about capital gains and the principal residence designation.
• Have a lawyer explain the rights and duties of both the life tenant and the remainder owner in writing.
• Compare other options, such as a will or a different form of co-ownership, before you register anything.

Frequently asked questions