A parents’ guide to home down payment gifts and loans

Loan forgiveness is an option

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.