If you loan money to a child, you can forgive the loan during your life or upon your death. Of course, you should only do so if you know you won’t need or want the money back in the future.
If you have loaned different amounts of money to your children, documenting the loans can help ensure an equal division of your estate. Some wills include a so-called “hotchpot” clause that accounts for all loans outstanding, so that one child does not receive a disproportionate gift or forgiven loan, as well as an equal share of the estate.
What are the tax implications of a gift or loan?
There are generally no tax implications to gifting in Canada. This differs from the U.S., which has a gift tax. U.S. citizens in Canada still need to be mindful of these U.S. implications. Only two situations may trigger additional income taxes for the parent: selling an asset at a capital gain or withdrawing an asset from a tax-sheltered account a registered retirement savings plan (RRSP). But gifting itself has no tax issues with adult children.
If a loan to your child was for investment or business purposes, forgiving it can have tax implications. This is in part because loan interest on funds borrowed to buy investments or fund a business is generally tax-deductible for the borrower.
As a result, forgiveness of such a loan may lead to a capital gain for the lender—if it’s forgiven during your life. If the loan is forgiven upon your death, there should generally be no tax implications.
If you loan money to a child to invest and the loan does not bear the Canada Revenue Agency prescribed rate of interest—currently 5%—the income may be attributed back to you and taxable to you. You can give an adult child money to invest and not be subject to attribution. But if you loan it and can call it back without charging the prescribed rate, the CRA will attribute interest, dividends, rental income and business income back to you. Capital gains, however, are taxable to the child.
Before you loan or gift money for a down payment…
When considering a gift or loan, you should first and foremost be sure that you are in a position to help your kids without risking your own financial security.
There may be family law, estate and tax implications to making a loan. Seek legal and tax advice from a qualified professional to protect yourself and your family.
Earlier this year, the HBP got a significant makeover. Here’s what’s new about the HBP, plus how you can use it together with other savings tools: a first home savings account (FHSA), a tax-free savings account (TFSA) and—recently introduced in Canada—EQ Bank’s Notice Savings Account. Read on for more details.
How has the Home Buyers’ Plan changed?
Home buyers should know about two major changes to the HBP. First, you can take out more money from your RRSP to buy or build a home—the maximum withdrawal amount has increased from $35,000 to $60,000, as of mid-April 2024. Couples can withdraw up to $120,000.
Second, you have more time to pay back your RRSP. As a temporary relief measure, home buyers who make an HBP withdrawal between Jan. 1, 2022, and Dec. 31, 2025, have five years to start repayment. Previously, the grace period was two years. The repayment period itself hasn’t changed—it’s still 15 years.
April 1, 2024, marked the one-year anniversary of the first home savings account (FHSA), a registered account that gives aspiring home owners $40,000 of additional tax-free savings room to save for a down payment. The FHSA has proven to be highly popular—as of April, more than 750,000 Canadians have opened one, according to the federal government.
“Home ownership is an integral part of most Canadians’ financial goals, and saving and planning are the cornerstones of achieving this dream,” says Mahima Poddar, group head of personal banking at EQ Bank. “The FHSA is an important tool in this journey, and it’s never too late to open one.”
The FHSA contribution limit is $8,000 per year, and you can carry forward up to $8,000 of unused room for one year. By 2028, Canadians who opened an FHSA in 2023 will have the full $40,000 of contribution room.
FHSA contributions are tax-deductible, and FHSA withdrawals are tax-free. Any money you earn inside the account is tax-free, as long as it goes towards buying a home. All of these benefits help buyers reach their savings goal faster.
Before locking into a familial loan, both parties must assess whether they are on the same page and are in a position to take on this type of agreement—along with knowing the power and relationship dynamics that could come with it. Here are six key considerations when borrowing from the Bank of Mom and Dad for your first home.
1. Is it a gift or is it a loan?
Determine if the financial help you’re discussing with your family is a gift or a loan. “Make sure there’s good communication with regard to the parent and the child about the nature of this,” explains Nicholas Hui, P.Eng, CFP, an advice-only Financial Planner at VAVE Financial Planning. “Is it a gift, or is it a loan? If it’s a gift, then I highly recommend having a ‘gift deed.’ A loan could be set up with some type of contract with payment terms and then seek legal advice to make it rock solid.” (More on gift deeds in a sec.)
If it’s a gift
If your parents gifted you money toward the down payment for your home purchase, then your mortgage lender may need proof of a gift deed or gift letter. In Canada, a gift deed is a legal document that transfers ownership of a property or asset from one party to another without exchanging money. This document confirms that the down payment amount from your parents is truly a gift and not a loan, which helps your lender verify the source—and nature—of the funds.
Hui also suggests discussing with your family whether it’s part of an early inheritance and, if not, whether other siblings should be informed to prevent future miscommunication over the division of assets, especially after your parents pass away.
If it’s a loan
If you’re considering a loan from a family member, discuss interest. If your parents decide to charge interest, it’s not necessarily a bad thing. For one, it could be beneficial to keep those funds “in the family” and support the Bank of Mom and Dad instead of a financial institution or mortgage company. And you’ll likely benefit, too, if the agreed-upon interest rate is less than prime.
Hui says parents could consider using the prime rate of Canada as a guideline (currently 6.95%) and then go a little lower or higher than that—but he says it’ll depend on the dynamics, loan amount and other factors.
Whether interest will be charged or not, Hui suggests having all aspects of the agreement—repayment timeline and terms of the loan—put in writing so everyone is on the same page.
2. Consider the tax implications
While there’s currently no “gift tax” in Canada, there are some tax implications to be mindful of. Interest charged on a loan is taxable income, so your parents will need to know that. “Like any investment, they’re loaning money to their child. If you pay them ‘income’ for that loan, it’s taxable,” Hui says.
Dividends are after-tax profits a company distributes among its shareholders, typically every quarter, and can be paid in cash or a form of reinvestment.
Heath said a company that pays a high dividend reinvests less of its profit into growth, potentially losing out on opportunities to up its market value. In Canada, stocks with high dividends come from a narrow slice of the stock market—banks, telecoms and utilities.
“Ideally, an investor should consider a combination of stocks with high and low dividends to have a well-diversified portfolio,” he said.
Contribute to RRSP, save on taxes
“There’s a lot of taxpayers, investment advisers and accountants who really promote the concept of putting as much into your (registered retirement savings plan) as you absolutely can,” said Heath.
As a financial planner, he thinks the contrary. Heath says using RRSP contributions to get the biggest tax refund possible is not necessarily the best approach for people in low tax brackets and can hurt them in the long run when they withdraw those savings at a higher tax bracket in retirement.
“Sometimes, it’s OK to pay a little bit of tax, as long as you’re paying at a low tax rate,” he said.
It can be wise to use the low tax bracket by taking RRSP withdrawals early in retirement, even though it might feel good to withdraw only from your TFSA or non-registered savings and keep your taxable income low.
A simple option to borrow to invest is by using a margin account at a brokerage. Depending on the existing investments in the account, a brokerage will lend up to a certain percentage of the value to an Canadian investor, at a specified interest rate.
You can have access to an amount of “maintenance excess,” which means that money needs to be kept in the account as collateral for borrowed securities. It generally ranges from 30% to 100% of the market value. Larger, established, blue-chip stocks may only have a 30% margin requirement, meaning up to $70 can be borrowed for every $100 invested.
Margin interest rates generally range from 7% to 10% but can vary. The interest is tax-deductible when the borrowed money is being used to invest but not if it is withdrawn and used for non-investment purposes. If stocks fall, in Canada, a margin account investor could have a “margin call” and need to deposit more funds or have to sell stocks to reduce leverage.
Investment and RRSP loans
Investment loans with required monthly principal and interest payments are another option for borrowing to invest. Registered retirement savings plan (RRSP) loans are often at competitive interest rates as low as prime. Non-RRSP investment loans may be at prime plus 1% or more. Interest rates are reasonably competitive because some financial institutions are getting paid twice on the same transaction, earning interest on the loan and generating fees on the investments purchased.
An investment loan may generate tax deductions, but only for the interest portion of the payments, not the full principal and interest payments. Interest on money borrowed to invest in an RRSP or a tax-free savings account (TFSA) is not tax-deductible, however, because the income being earned is not taxable income. Interest paid to earn taxable non-registered investment income (such as outside of a registered account) is tax-deductible.
Using a mortgage or line of credit to invest
Lines of credit or mortgages on real estate can be used to invest, and the interest can be tax-deductible as well. An important distinction is that it is the use of borrowed funds that determines tax deductibility. Borrowing money against a rental property does not make the interest automatically tax-deductible if the funds are used for a personal purpose. Borrowing money to invest—whether it’s in stocks, bonds, mutual funds, exchange-traded funds (ETFs), a rental property or a business—is a common criteria for interest deductibility.
Interest for funds used to finance an income property can be deducted on your tax return, including money borrowed against a personal-use property, like a home or cottage, if the funds are used towards a down payment, renovation or other costs for a rental property that earns rental income.
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Is borrowing to invest worth it?
Borrowing to invest can enable an investor to amplify their returns by leveraging their capital invested. But is borrowing worthwhile?
You can come up with different results to support or oppose borrowing to invest, depending upon the time period you pick. But if we go way back to 1935, the long-term average prime lending rate in Canada has been about 7%. Canadian stocks as represented by the TSX have returned 9.5% per year. The S&P 500 in the U.S. has generated about an 11.4% annualized return including reinvested dividends. All figures are as of December 31, 2022.
So, how much of a down payment do you need for a second home? That depends on a few factors, including whether or not you intend to live at the property.
Down payment requirements in Canada
Every Canadian home buyer is required to have a minimum down payment when purchasing property. A down payment is the money provided up front towards the purchase of the home, and it is directly tied to the value of the property.
When buying a home, the down payment rules in Canada are as follows:
Purchase price
Minimum down payment required
$500,000 or less
5% of the purchase price
$500,000 to $999,999
5% of the first $500,000 of the purchase price + 10% of the portion of the purchase price above $500,000
$1 million or more
20% of the purchase price
If you’re buying a home priced under $1 million and your down payment is less than 20%, you’ll need to purchase mortgage default insurance, also known as mortgage loan insurance—which protects the lender if you can’t make your mortgage payments. Using a mortgage down payment calculator is the fastest and simplest way to figure out how much money you will need for your home down payment.
Minimum down payment for a second home in Canada
Contrary to popular belief, there’s no blanket 20% down payment requirement for second-home purchases in Canada. In fact, the down payment rules for a second home are similar to those listed above for single-property ownership, as long as the second home will be owner-occupied, meaning the owner will be living in it.
“You can purchase a second home with 5% down as long as the property is intended for family use throughout the year and the mortgage is under $500,000,” says Samantha Brookes, CEO of Toronto-based Mortgages of Canada.
The 5% down payment requirement applies to second homes with one or two units in them. For properties with three or four units, the minimum down payment jumps to 10%.
Buildings with five or more units are considered commercial buildings, and they require a commercial mortgage. Depending on the property’s location and the buyer’s cash flow, lenders may require a buyer to have a down payment of 20% to 35% on commercial properties, according to Brookes.
Timing markets is also very difficult, because markets are not always rational, nor are the countless factors influencing them easily predictable. This applies to stock markets, real estate or any other asset. If everyone knew stocks were overvalued by 10%, they would all sell until the market fell by 10%. If everyone knew stocks were going to rise, they would all buy. In practice, there are always buyers and sellers at any given point in time, and markets ebb and flow. The same applies to real estate. Supply and demand influence prices, and prices can be too high or too low, with the perfect time to buy or sell only known in retrospect.
Is real estate a secure investment?
Real estate has been in an upward trend in many Canadian real estate markets for the past 25 years. There has been an unusually long and steep increase in prices in many cities. There has been a 5% year-over-year price decrease through April 2023 in Teranet-National Bank National Composite House Price Index, representing a record contraction. But over 5 years, despite the pullback, annualized growth has been 5.9%.
I feel people put too much emphasis on what financial advisors, real estate agents, economists, and other people say about stocks and real estate. Despite extensive research and best intentions, it can be difficult for anyone to anticipate what is going to happen next. Nobody has a crystal ball.
Investing for a down payment
Investing a down payment fund is difficult at the best of times, but especially now given low interest rates. Canadian, U.S., and international stock markets have all had annual losses of 30% or more in the past, so going all-in on stocks with money you need in a year could see your down payment fund reduced by one-third. Even a balanced fund can lose money in a given year. In 2008, during the financial crisis, a typical Canadian balanced mutual fund with 50% to 60% per cent in stocks lost over 15%. In 2022, losses were typically in the 5% to 10% range and 10% to 15% for investors with a higher allocation to U.S. stocks.
Timing the markets with investments
If you had a three- to five-year time horizon, Liz, it is much less likely you would lose money in a balanced portfolio. With five or more years, a diversified stock portfolio is also unlikely to lose money, making stocks a great long-term investment despite the short-term volatility.
If you were willing to take on some investment risk, you would need to be aware of the potential for losses over a one- to three-year time horizon, or even longer. If your down payment is big enough that you could qualify for a mortgage well in excess of your needs, you could invest some of your money in stocks. You could do so knowing that if your investments fell, you could take on a larger mortgage to wait for your investments to recover and potentially pay down some of your debt at that time. Alternatively, if you chose to sell your investments at a loss in our notional scenario, you could be left with a smaller down payment, and you would need to be aware of that risk.
There are other risks as well. What if you lost your job or you or one of your children had an emergency that meant you needed to access your investments at a time when they could be worth less than they are now?
Young homebuyers like open spaces with functionality and personalization.
IKEA USA
My parents were in their 20s when they bought their first home. It was the 1950s, Midcentury Modern, (my mother’s favorite furniture style) was just modern, and the house, a Dutch colonial in Brooklyn with four bedrooms, one full bath and two half baths, cost them about $25,000. That would be about $285,000 today, adjusted for inflation.
It was a perfect home for a family of that era, with a finished basement for kids to play in during the winter and a side yard for outdoor games in the warmer months. That mattered more than the whole family sharing one bathroom at the end of the hall, not uncommon in the decades before ‘master suites’ came to dominate home plans. It was located in a safe, walkable neighborhood with good schools too.
My childhood house most recently sold for $1.25 million in 2018, putting it out of reach for most 20-somethings wanting to start their own families in the next few years, as my parents did. In that way, it’s an exemplar of our times, and one of the reasons why Generation Z only owns about 2% of American homes. It’s not for lack of desire!
Real estate technology firm Hommati reports that 97% of these young adults, born between 1997 and 2012, want to become homeowners – most before they’re 35! I asked several experts how to help them fulfill these dreams and ideals. Their responses, sent by email, follow.
Benefits of Home Ownership
“The core benefits of homeownership haven’t changed over the decades, but their significance for young people, particularly in terms of long-term financial outcomes, has been magnified,” shares Rob Chrane, CEO of Down Payment Resource, a firm that helps match eligible buyers with homeownership assistance programs.
Owning a home is the most powerful vehicle most Americans have for building wealth, he points out, with the median net worth of homeowners 40 times higher than renters. “Gen Z’ers who buy a home early in life will benefit from more years of appreciation and equity accumulation,” he adds.
There are non-financial benefits too, Chrane notes. “Studies have consistently shown that homeowners experience better educational and health outcomes compared to renters. Stability and ownership pride often translate into greater investments in the local community, leading to the creation of better, safer, and more stable neighborhoods and communities.” This has benefits for their children’s generation too. It’s much harder to achieve for these young parents than it was for mine – and probably yours too.
American Dream Challenge
“Throughout the three waves of the America at Home Study, we observed significant insights into the perspectives of younger generations. One finding is that younger generations tend to define home as ‘family’ to a greater degree compared to other generations who are more inclined to define home as a ‘safe place’ and ‘comfort,’” shares Teri Slavik-Tsuyuki, the study’s co-founder and principal at community development research firm tst ink.
Sadly, there are major gaps between their yearning for home, family, comfort and their perceived ability to achieve these, she observes. Covid widened them. “While the pandemic had major ramifications for everyone, it greatly influenced the well-being of younger generations in contrast to their older counterparts. Their mental, emotional and financial well-being faced heightened challenges when compared to other age groups,” she says.
Vision of Home
Here’s what these hopeful buyers would like to achieve when they finally have the means to become homeowners. “In their homes, they love DIY projects and love to personalize individual products while aligning with their sustainable practices,” reveals Abbey Stark, interior design leader at IKEA USA. “They aspire to have purposeful and unique spaces that they can create an escape from the chaos of the world and everyday life. They believe in the importance of curating spaces to fit their wants and needs.,” she adds. That DIY inclination will prove extremely helpful in buying some of the fixer homes available in lower price ranges.
When it comes to their key kitchen and bath spaces – some of a home’s most valuable square footage – they’re focused on personalized and very functional spaces, Stark says. “They enjoy mixing vintage, repurposed and sustainable products.” Self-care is prioritized for a sense of wellbeing and comfort, shaping spaces that are easy to use. Technology is also essential for these buyers, the designer adds.
Down Payment Hurdle
“The biggest barrier to homeownership for young, early career homebuyers often isn’t the monthly mortgage, it is the immense challenge of saving for down payment and closing costs — which typically exceed $10,000 on the very low end,” Chrane observes. Elevated home prices are driving these numbers up too, he adds.
The good news is that there are down payment assistance (DPA) programs that can help first time buyers, he shares, including HUD-approved housing counselors that meet national standards, plus online courses. “The ‘best’ DPA could come down to how the assistance money can be used. Can it be used to cover closing costs so the buyer doesn’t have to rely on the seller to cover those and can thus make a more competitive offer on a contract? Can the funds be used to reduce the first mortgage interest rate? Reduce mortgage insurance costs? Cover pre-paids? Repairs on the new home? Eligible uses of funds could be the difference maker for some buyers,” he suggests. These assistance programs are also starting to become available on manufactured and multi-family housing, opening more options for buyers.
There are more than 1300 agencies, including state and local housing finance agencies, cities, nonprofits and others helping new homebuyers, Chrane comments, sharing a link homebuyers can use to research what’s available for them.
The CEO urges young buyers to research their options sooner rather than later. “Don’t wait around for the market to change, and don’t wait around to learn what your path to homeownership looks like.” Being prepared in a volatile market seems like sound advice.
