Homeownership: When your Son or Daughter has a Developmental Disability

So, you’re thinking about buying a home for your son or daughter?

First question: Why?

What do you want to accomplish? What can OWNERSHIP accomplish that renting or government subsidized care can’t? This is a crucial question. Given the complexities/cost of home ownership, unless you’re 100% certain of your objectives, ownership is probably not the right option for you.

Second question: How will your son or daughter’s mental capacity affect ownership?

Are they legally capable of signing a Purchase & Sale agreement? If not, do they have a court appointed decision-maker, ie. a Committee?

Special note re Representation Agreements: Rep Agreements are useless with respect to homeownership. Section 2(2)(c) of the Representation Agreement Regulation [B.C. Reg. 162/2011], specifically prohibits Rep Agreements from being used to buy or sell real property.

Third question: Are you aware of the income tax implications?

The capital gains taxes on real estate can be VERY high – especially in the Lower Mainland. While the Principal Residence Capital Gain Exemption [“PRCGE”] applies to your own residence, it may not apply to your son or daughter’s home. Have you considered the taxes that may be payable – even if the home is not sold?

The problem is, changes in various Canadian laws in 2016-2017 have considerably reduced the number of realistic home ownership options for many families. The following covers many of the different home ownership options open to you.

Types of Ownership

In your Son’s or Daughter’s Name

The property is registered in the name of your son or daughter. (This is the model that parents typically mess up the most – mainly because it SEEMS simple!)

Pros

  • No capital gains taxes, as the PRCGE applies.

Cons

  • If deemed to have full mental capacity, your son/daughter can give away/sell the property whenever they want, to whomever they want.
  • If not deemed to have full capacity (by the lawyer/notary assisting with the sale), the property can’t be sold without a Court Order (and a Committeeship)
  • Upon your son’s/daughter’s demise, it becomes part of their estate, and attracts probate fees. Does your son/daughter have the legal capacity – “testamentary capacity” – to do a will?

In your Name

The property is registered in your name.

Pros

  • Son/daughter have no control over the property, so they can’t give away.
  • While you’re alive, easy to sell.

Cons

  • Unless you also live in the property – full capital gains taxes are payable upon either the sale or your death. Does your estate have the available funds to cover the tax liability? (If not, the home may need to be sold on your demise.)
  • What happens to the home when you die? (A myriad of estate issues, such as: capital gains taxes owing, probate fees, estate challenges by other sons/daughters, review and challenges by the Public Guardian and Trustee, etc.)

A Percentage In your Name

Part of the property is registered in your name, part in your son or daughter’s name – as “tenants in common.” The worst of both worlds!

Pros

  • Son/daughter only has partial control over the property, so they can’t give away. (However, their creditor/spouse could still force the sale of the property.)
  • Partially and possibly fully exempt from capital gains taxes.

Cons

  • Unless you also live in the property – a portion of capital gains taxes may be payable upon either the sale or your death.
  • If your son/daughter is not deemed to have full capacity (by the lawyer/notary assisting with the sale), the property can’t be sold without a Court Order (and a court appointed decision-maker: ie. a Committeeship)
  • What happens to your share when you die? (A myriad of estate issues, such as: capital gains taxes owing, probate fees, estate challenges by other sons/daughters, review and challenges by the Public Guardian and Trustee, etc.)
  • If held in joint tenancy (as opposed to tenants-in-common), upon your demise, it has all of the problems of your son/daughter owning it, as listed above.

In the Name of a Living Trust

By way of background, a “Trust” is a medieval, very useful, common law concept. In a Trust, there’s a separation between the “legal” and “beneficial” ownership of the property. A “Trustee” has legal title to the property, while the “Beneficiary” is the only person who can use the property. In our situation, it permits someone with full mental capacity – such as a parent, sibling, friend, trust company – to legally own the property, while your son or daughter is the beneficiary, and gets to live in/use the property.

A “living trust” is a Trust which is created while the “Settlor” (or Creator) is still alive. This is different than a “testamentary trust” which is created, via a will, after the Settlor dies.

When a Living Trust is used to hold a property:

Pros

  • Son/daughter has no legal control over the property, so they can’t give it away.
  • As the Trustee has full mental capacity, no issues with selling.
  • The death of a parent or the son/daughter has zero impact, as the property is not part of anyone’s estate.
  • The Trust Deed can specify what happens to the property when your son/daughter passes on.

Cons

  • Full capital gains taxes are payable upon the sale of the property, as a living trust currently doesn’t qualify for the PRCGE.
  • Income within living trusts is taxed at the highest marginal rate – currently in BC, about 49%.
  • Taxes are more problematic in that a living trust is deemed to dispose of its assets every 21 years. Hence, capital gains taxes MUST be paid every 21 years, whether the property is sold or not. In a real estate market like Vancouver, this can result in a very high tax bill – ie. $100K or more – payable every 21 years. If the trust doesn’t have significant funds in addition to the property, the deemed disposition could force the actual sale of the property.

In the name of a Qualified Disability Trust (“QDT”)

The property is held by a trust created within your will.

Pros

  • Son/daughter have no legal control over the property, so they can’t give away.
  • As the Trustee has full mental capacity, no issues with selling.
  • The Trust Deed can specify what happens to the property when your son/daughter passes on.
  • No capital gains taxes, as a QDT can utilize the PRCGE.

Cons

  • As a parent, you need to be dead to utilize a QDT.
  • Your son/daughter can only have one QDT in a given tax year, so if as a parent, you’re divorced (with two parents creating QDTs), or have grandparents who also set up a QDT, it can get complicated.
  • As the property (or funds to purchase the property) is initially part of your estate, it’s open to legal claims by other beneficiaries, probate fees, etc.

In the Name of a Living Trust

Or a QDT, with a subsequent Life Interest to your Son or Daughter. This is the most expensive model. It CAN be brilliant, or it can be a disaster, depending on your circumstances. In this model, the home is held a trust, and then the trust registers a subsequent “life interest” with the son or daughter’s name on the property.

Pros

  • No capital gains taxes, as the son/daughter qualifies for the PRCGE applies.
  • If the son or daughter has full mental capacity, easy to sell.
  • Little risk of son/daughter “giving the property away”, because a scam artist/creditor would not want a Life Interest – too hard to sell.
  • As the property is ultimately distributed, as per the trust deed, so no/few estate issues.
  • Avoids the 21-year “deemed disposition” because the property is temporarily outside the trust.

Cons

  • If son/daughter is not deemed to have full capacity (by the lawyer/notary assisting with the sale), the property can’t be sold without a Court Order (and a Committeeship). This can be expensive/stressful.
  • Requires two property transfers, so the Property Transfer Tax must be paid twice.

In the Name of a Microboard

Or other non-profit society. Property is held in the name of the son’s/daughter’s microboard or other non-profit society.

Pros

  • Son/daughter has no control over the property, so they can’t give away.
  • As a non-profit is deemed to have full mental capacity, no issues with selling.
  • No estate issues, as the property is not part of anyone’s estate, HOWEVER. . .
  • No capital gains taxes.

Cons

  • As all non-profit society assets must legally go to another non-profit, family loses control of home upon son/daughter’s demise. The property cannot go to another family member.

In the Name of a Corporation

Property is held in the name of a business corporation. This is the worst option from an income tax perspective.

Pros

  • Son/daughter has no control over the property, so they can’t give away.
  • As a corporation is deemed to have full mental capacity, no issues with selling.
  • No estate issues, as the property is not part of anyone’s estate – the proceeds ultimately pass to whomever owns the corporation’s common shares.

Cons

  • SERIOUS taxation issues. Capital gains are deemed to be “passive corporate income” and are hit with tax penalties over and above regular capital gains taxes.

In the Name of a Charity

Property is placed in the name of a charity, with a leaseback option.

Pros

  • Son/daughter has no control over the property, so they can’t give away.
  • No estate issues, as the property is not part of anyone’s estate.
  • No capital gains taxes.
  • Get a tax receipt for a portion of the value of the property.

Cons

  • Family has no control over ownership, so property can’t typically be sold/replaced if it is no longer suitable for the son/daughter’s needs.
  • As family loses home upon son/daughter’s demise (reverts to the charity), it cannot go to another family member.

Conclusion

Ultimately, there’s no “perfect solution”, but some options have fewer negative consequences than others. If/when the Federal government chooses to reinstitute the PRCGE for living trusts, these may go back to being the superior option.

Always get proper legal and tax advice before using any of the above options. Individual circumstances can always affect the outcomes.