Transferring Real Estate to Your Children: Gifting vs Selling

Transferring real estate to a child is a decision many Canadian families face as property values increase and intergenerational wealth planning becomes a priority. Whether it's the family home, a rental property, or a vacation cottage, there are several options available—each with distinct tax consequences, legal implications, and long-term considerations.

Generally, there are three primary ways to transfer real estate to a child:

1. Gifting the property

2. Selling the property

3. Transferring the property using a trust

This article will focus on the first two: gifting and selling, including the advantages, risks, and tax consequences of each. A separate blog will cover the use of trusts in real estate transfers in greater detail—stay tuned for Part 2.

1. Gifting Real Estate

Gifting involves transferring ownership of a property to a child without receiving payment. While the transaction may seem simple, it carries significant tax consequences under the Income Tax Act.

Deemed Disposition:

• A gift is treated as a deemed disposition at fair market value (FMV).

• The parent is taxed on the capital gain, calculated as the difference between FMV at the time of transfer and the original adjusted cost base (ACB).

• This capital gain must be reported in the year of the gift, even if no money changes hands.

Principal Residence Exemption (PRE):

• If the property was used exclusively as a principal residence, the gain may be fully exempt from tax.

• If the property was used only partially or not at all as a principal residence, only a portion (or none) of the gain will be exempt.

  
  

Rental or Vacation Properties:

• Gifting a rental property or secondary residence will result in a fully taxable capital gain.

• In addition, any capital cost allowance (CCA) previously claimed must be recaptured and reported as income in the year of the gift.

  
  

Land Transfer Tax (LTT):

• In Ontario, LTT is not payable when a gift is made without consideration (i.e. no money is exchanged), unless the child assumes an existing mortgage.

• If a mortgage is transferred or assumed, LTT is calculated based on the value of the debt.

Loss of Control and Legal Risks:

• Once the property is gifted, the parent no longer has legal or financial control.

• The property becomes part of the child’s asset pool and may be subject to creditor claims, family law disputes, or future sale decisions outside the parent’s influence.

This method is straightforward in legal terms but may create substantial immediate tax exposure. It is best suited for situations where the parent is prepared to relinquish ownership and control permanently and where the tax implications are manageable.

2. Selling Real Estate to a Child

Parents may prefer to structure the transfer as a sale, either at full market value or at a discounted price. This option offers more flexibility and allows for a formal exchange of value, but the CRA imposes strict rules to ensure the transaction is treated appropriately for tax purposes.

Selling at Fair Market Value:

• The transaction is treated as an arm’s length sale, even though it involves related parties.

• The parent reports a capital gain equal to FMV minus the ACB, just as they would in a third-party transaction.

• The child’s adjusted cost base becomes the purchase price (FMV), which helps avoid mismatches in future tax events.

• Land transfer tax is payable by the child based on the purchase price.

• The child will need to secure financing or arrange a vendor take-back mortgage (VTB) with the parent.

This method offers cleaner tax reporting and is often preferred when the parent wishes to partially monetize the asset or when long-term tax planning is a priority.

Selling Below Fair Market Value:

• The CRA still requires the seller (parent) to report the transaction as though it occurred at FMV.

• However, the buyer (child) is deemed to have acquired the property at the actual amount paid, creating a mismatch in cost base.

• This mismatch can result in double taxation—first when the parent reports a gain based on FMV, and again when the child eventually sells the property and is taxed on the full difference between their lower cost base and future FMV.

Example: If a parent sells a property worth $800,000 for $400,000:

• The parent is taxed on a gain of $800,000 minus ACB.

• The child’s cost base is only $400,000, meaning if they later sell it for $900,000, they’ll be taxed again on a gain of $500,000, even though part of that gain was already taxed at the parent’s level.

Other Considerations:

• The CRA may scrutinize related-party sales to ensure they are not being used to avoid or shift tax improperly.

• If using a vendor take-back mortgage, the parent may be eligible to claim a capital gains reserve, deferring recognition of a portion of the gain over up to five years.

Selling is more complex than gifting but can be more tax-efficient in some cases, particularly when executed at FMV. It also allows for more structure and financial fairness in blended families or among multiple children.

Next in the Series: Trusts and Real Estate Transfers

While gifting and selling are the most common transfer methods, some families may benefit from the use of inter vivos or testamentary trusts to hold real estate for the benefit of children. Trusts introduce an additional layer of control, asset protection, and succession planning, but they come with unique tax and reporting requirements.

Part 2 of this blog series will explore the use of trusts for real estate transfers in detail