The dream of homeownership seems like it is becoming increasingly out of reach for many young Canadians. For those who are purchasing homes – or plan to in the near future – they may be relying on gifts or loans from their parents to help them with their down payment.
If you are considering helping your child purchase their first home, there are a few things that you need to know first – particularly as to how that gift might be affected in the event your child separates from their spouse or partner.
How is property divided during a separation?
In Ontario, when couples separate, their property is divided between them in a process called “equalization.” In other words, each spouse is entitled to an equal share of the others net worth that they accumulated during the marriage – also called their “net family worth” or NFP.
How are NFP and equalization calculated?
Here is a simple example to illustrate how NFP is calculated.
Spouse A has a net worth of $10,000 when they get married and a net worth of $100,000 when they separate. Their NFP is $100,000 – $10,000 or $90,000.
Spouse B has a net worth of $0 when they get married and a net worth of $50,000 when they separate. Their NFP is $50,000 – $0 or $50,000.
Equalization is calculated by dividing the difference of the NFPs equally between each spouse. The difference between Spouse A’s NFP ($90,000) and Spouse B’s NFP ($50,000) is $40,000. Therefore, Spouse A would have to pay Spouse B $20,000 so that each spouse would leave with $70,000.
But homes are calculated differently!
The one major exception to the example above is the matrimonial home. If one spouse brings a home into the marriage and the couple lives in that home, then at the date of separation the entire value of the home is used to calculate the equalization payment.
Why is this a risk when helping your child purchase a home?
If your child is not yet married and you gift them money to purchase a home, there is a risk that if they get married later on and then separate, they will have to share the entire value of the home (including the value of your gift to them) with their ex. The same holds true if your child has a common-law partner who – in the event of a separation – could file a trust claim to get some of the value of the property if they were helping with mortgage payments or maintenance costs.
If your child is already married or has a common-law partner, there is the same risk because although gifts received during the marriage are typically exempt from equalization, this is not the case with gifts that are used for the purchase or maintenance of a matrimonial home.
So, what is the solution?
If you would like to gift or loan your child money to purchase a home, the best way to protect those funds is through a cohabitation agreement (for common-law couples) or marriage contract (for married couples). These documents set how your child and spouse/partner will divide their assets in the event of a separation and it allows them to make their own decisions upfront rather than having to follow the regular property law as outlined above.
If you would like a lawyer to draft a cohabitation agreement or marriage contract, contact Mikhailitchenko Law Office today.