Helping your kids buy a house is wonderful and generous, but beware the pitfalls - you could lose all your hard-earned cash.

Young people today sometimes find it difficult to come up with an adequate down payment for their first home, even though they may have great income - particularly if they are attempting to avoid CMHC fees that apply when anything less than 25% of the purchase price is the down payment amount.

This is an area where the parents can help, possibly by offering a loan or a gift.

The current tax laws do not impose any tax on a cash gift to a child when those funds are used to purchase a home for personal occupancy (there are, however, tax implications if the funds are used to purchase an income producing property).

Therefore, a parent can "gift" a down payment assuming the parent does not require the money to be repaid at a later date.

If the funds are to be repaid to the parent, then the funds become a "loan", and this loan must be documented - either with a mortgage or a promissory note. Remember, a promissory note can become a worthless piece of paper if the child becomes bankrupt or insolvent. So, the best protection for the parent is to take a mortgage from the child, against the house that the child is purchasing, at the time of making the purchase.

Of course, a parent may not have liquid cash readily available, but may have plenty of equity in their own home. The parents can "lend" this money to the child by way of a guarantee to the bank for the child's loan, or, by actually placing a mortgage on the parents' home and in turn lend those monies to the child. The financial institution mortgaging the parents' home usually will want an appraisal on the property owned by the parents.

In this latter situation, the parent should absolutely make sure to take back a "mirror mortgage" on the same terms and conditions against the child's property, in order to protect their own position somewhat.

There are many questions needing to be asked and answered:

• What happens if my child gets divorced? or dies? or lives common-law?
• What happens if my child becomes unemployed? Who makes the mortgage payments? if there are any.
• Who pays the taxes?
• Who pays the insurance?
• Who really owns the house?
• If anyone puts a lien on the house, where does the parent stand?

Remember, it's wonderful if you are able and want to help your children make the most important purchase they will ever make. But, in ALL circumstances you should seek legal advice BEFORE entering into any "loan" arrangement - in order to protect yourself in your own particular situation.

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Published: March 19, 1999

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