Co-ownership: Are there any tax implications if you sell part of your house to a relative?

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I sold half my principal residence to a family member, and now we all live in the house together. The property continues to be my principal residence. Do I have to pay any capital gains taxes on the sale?
—Ellen 

Selling part of a home to family—any tax issues to know about?

When a home is a primary residence, its sale does not trigger a taxable event under the Canada’s Revenue Agency’s (CRA) principal residence exemption. For the home to qualify for the full exemption, you must have lived there for all the tax years that you’ve been the owner, and you must not have used it as an investment property.

So, it sounds like you won’t need to pay any capital gains taxes in this situation, Ellen. 

Tax credit when buying part of a home from a relative

Here’s more good news: the family member who purchased half the property from you might be eligible to receive a tax credit, if they’re considered a first-time buyer under CRA rules. The First Time Home Buyers’ Tax Credit is a $5,000 non-refundable tax credit buyers can claim on their annual tax return when they purchase a qualifying home, which could save them up to $750 in taxes. 

The latest federal budget proposes to increase the amount used to calculate the HBTC to $10,000, which would provide a tax credit of up to $1,500 to eligible home buyers. If approved, the change would be retroactive to sales on or after Jan. 1, 2022.) An accountant would be able to provide more comprehensive advice on this, Ellen.

What does a co-ownership agreement mean in Canada?

Putting taxes aside, there are other issues to take note of now that you and your relative share ownership of the home. Establishing a legal co-ownership agreement, if you haven’t done so already, will be in everyone’s best interest. This will allow you to have discussions and provide clarity while the two of you own the property together. 

A co-ownership agreement covers the following:

Ownership structure and decision-making processUse of the propertyFinancial and insurance arrangementsHome operation and upkeepCo-owner negligence or misconductDispute resolutionExit/entry provisions

Although some of these topics may never pose a problem for you, it’s better to have the expectations established from the get-go to protect all parties, minimize conflict and promote fairness. When getting a co-ownership agreement prepared, it’s best that you and your relative have separate lawyers representing each of you independently.

Structuring co-ownership

Another factor to consider in this new property relationship is the structure of the co-ownership. You can be joint tenants or tenants-in-common.

Joint tenancy is a common structure for married couples. It’s where each owner has an interest in property. If one owner dies, their share of the home goes directly to the other owner, rather than the estate. Tenants-in-common is a more independent approach to ownership. Each owner owns a documented portion of the property, which becomes part of their estate when they die.

Clearly, choosing the right co-ownership structure is an important consideration for estate planning purposes, so it’s best to consult a lawyer or estate planner to help you decide which is best for your circumstances.

With a little advance planning, owning a property with a family member (or others) can be a successful arrangement. Happy co-ownership, Ellen!

Meghan Chomut, CFP is a financial planner with Porte Rouge.

Qualified Advice is written by members of FPAC (the Financial Planning Association of Canada), a MoneySense content partner. Working closely with governments, regulators, financial planners, academia, vendors and the general public, FPAC’s goal is to set standards and principles that will allow financial planning to evolve into a knowledge-based profession that ultimately commands the credibility, public awareness and respect afforded to other advisory professions.

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