At Dale Streiman Law LLP, we are asked as lawyers for the purchaser to act on all matters. On financing, when purchasing a home, there are monies lent by a parent to child for the purposes of down payment and closing costs. While often called a “gift” or “loan”, the expectation is that such monies are to be repaid at some point in the future. If the lender permits such loan or gift, the monies being loaned by a parent to child should be secured in some fashion. The preferred route would be by way of a subsequent mortgage registered against the property on closing as this becomes registered security. In the alternative, a promissory note can be given payable either on demand or with terms of payment over a certain period. However, it must be known that a promissory note does not provide registered security like a mortgage and could give rise to default by the child on such “gift” or “loan”. In either case, the documents should be executed by the child and their spouse, if applicable and the parent providing the said funds. If a mortgage is given, the parents giving the loan should hold the property as joint tenants, with a right of survivorship in the event the parents are elderly. Joint ownership of any mortgage, loan or lien would result in the ownership of the loan being passed to the surviving owner/spouse in the event that one of the spouses dies.
The other disturbing issue that many parents and clients are not aware when parents loan children monies for their purchase is that if the loan is not secured, monies advanced by the parents may be considered by any court as a gift not to the child alone but their spouse. If monies were secured by way of mortgage or a promissory note, the documents would be prepared based on a “demand loan” so that the parents can demand the return of the monies. If the parents loan the monies and payments on the loan are to be made sporadically, monthly or otherwise and such payments are not made for two years, the courts may decide that the loan cannot be enforced under the terms of the Ontario Limitations Act. That may result with the spouse of the child remaining in the home, without liability to repay the parents on any loan even if the loan was secured by way of a registered mortgage on the property or by an unsecured debt evidence, such as a promissory note.
Parents often ask if the interest if charged under such loan is to be declared as income on the parent’s tax return. The answer is that interest is to be declared unless such interest is forgiven or rescinded and evidence of such forgiveness is in writing and if that complies with cases and rules of the Canada Revenue Agency. The parents can forgive the interest accruing under some debt annually on such basis.
ELLIOTT DALE/SHANA DALE
