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Beware before gifting the home

Helen Morris
National Post
July 2, 2011

Homes and inheritances can be tricky. "Forward planning and talking to objective advisors makes a big difference," says Carol Bezaire, vice-president, tax and estate planning at MacKenzie Financial in Toronto. "The principal residence is one of those things that has an emotional attachment for a lot of people."

Gifting your property before death, but still living there, may appear to give you more of a say as to who gets what when.

"If you put the property in the child's name, there are some risks you are assuming. The key one is the loss of control of the property," says Sara Kinnear, tax and estate planning expert with Investors Group in Winnipeg. "You won't be able to mortgage it without your child's consent and if the child is the sole owner, the child would be able to mortgage it without your consent."

Ms. Kinnear says that if your child has financial difficulties or is involved in divorce proceedings, your home may be part of any settlement with creditors or a former spouse. One reason to gift despite these risks, may be a desire to save your descendants probate tax.

"This whole gifting-of-the-principal residence strategy would have to take into account how much probate you're really going to save doing that ahead of time," Ms. Bezaire says. "If you're going to save $3,250 (for a $250,000 property in Ontario) in probate costs how much will it cost you in legal fees and land transfer taxes to change the ownership of your home?"

Ms. Kinnear says even in Ontario and British Columbia where probate costs are highest, gifting your principal residence before death may not be worth your while financially.

"Your principal residence will not attract a capital gain, so in Ontario the clock starts ticking at th time of death," Ms. Kinnear says. "However, if you gift before death any gains from this point forward are going to be the child's gains. If the parent has remained the sole owner and then kept it until death, the all the gains up until the date of death would have been exempt under the principal residence exemption. Now only the ones before the gift will be exempt. That might mean the savings on probate are outweighted by the loss in capital gains exemption."

Ms. Bezaire says an alternative would be to add your child as a joint owner of the property with a right of survivorship. Ms. Bezaire says what works depends upon which province you are in and terms and conditions must be carefully drawn up by a lawyer. Such an arrangement could make your child a trustee.

"They're going to be able to take over the house without waiting to go through the will," Ms. Bezaire says. "If they sell it, they are deigned to be the trust of that money, which means if there are sisters and brothers they're going to split that money up. It's not just a gift them specifically."

Both advisors say transfer of ownership risks loss of control and may not be the financial saving you had thought.

"You never really know what is going to happen," Ms. Kinnear says. "The best protection for the parent is first of all not to (transfer before death) in the first place."

Posted on Tuesday, July 5, 2011 at 01:16PM by Registered CommenterElaine in , | CommentsPost a Comment

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