What Is a Life Estate in Ontario and How Does It Work?

A parent may want to stay in the family home for life while making sure it eventually goes to a child. A life estate is one way people try to do that. It is also a common source of confusion for the heirs who are expected to take the property later.

This article explains the idea in plain words and points out the tax, family law and title issues that tend to come up. The details depend on the document that creates the life estate, so have a lawyer review it.

What a life estate means

In general terms, a life estate splits ownership over time. The life tenant has the right to use the property for as long as they live. Another person, often called the remainder owner, is entitled to the property when the life tenant dies.

What the life tenant may do, such as rent the home out, borrow against it or sell their interest, depends on how the interest was created. The wording of the deed or will matters, so do not assume the answers without checking.

Tax issues when a home is transferred

Putting a life estate in place usually means transferring an interest in land, and tax can follow even in a family arrangement.

• Land transfer tax: the Act has no general exemption for gifts of land, but if no consideration of any kind passes, no tax is payable because the tax is calculated on a nil value.
• Mortgage exception: 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.
• 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.
• Receiving a gift or inheritance: the person who receives it is deemed to acquire it at fair market value.
• Principal residence: if you sell, or are considered to have sold, your principal residence, you must report the sale and designate the property on Schedule 3 to claim the principal residence exemption.

How a life estate is valued for tax purposes is a technical question that depends on the facts, so speak with an accountant or lawyer before transferring.

Spouses and the family home

If the home is a matrimonial home, both spouses have an equal right to possession, whoever is on title. No spouse may sell or mortgage an interest in a matrimonial home 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.

Transfers between spouses are treated differently for income tax. 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. The matrimonial home rules apply to married spouses, and common-law couples are treated differently.

How it ends and what can go wrong

A life estate generally ends when the life tenant dies, and the property then passes to the remainder owner. Title records should be updated to match, and a lawyer can tell you what must be registered.

Disputes can arise between a life tenant and the remainder owner. Under the Partition Act, a person interested in Ontario land may apply to court for partition or sale. Whether that helps in a given life estate depends on the facts, so get advice before starting any court step.

Anyone can search and download current and historical property records, such as a parcel register, through OnLand for a fee. Checking the register is a sensible first step if you are unsure what interests are recorded.

What to do next

• Get the deed, will or agreement that creates or describes the life interest.
• Search the parcel register through OnLand to see what is recorded.
• Ask an accountant about capital gains and the principal residence exemption before any transfer.
• If the home is a family residence, check whether a spouse must consent.
• Have a lawyer explain who pays for repairs, taxes and insurance, and what happens if the life tenant moves out.

Frequently asked questions