Gifting a down payment in Canada: everything you need to know

It’s increasingly common for Canadian families to “gift” their children, loved ones, or other family members money to help them purchase a home. The money typically comes in the form of a down payment to help cover the increasing housing costs across the country. And we all know that a larger down payment can mean lower homeowner costs. Borrowers who can make a 20% down payment have smaller monthly payments, and will have a stronger risk profile from the lender’s perspective.

Although recent rate hikes have tamped down a red-hot housing market, many Canadians find purchasing a house solo (despite their income) unattainable. According to the OREA, as of February this year, in Canada, “4 in 10 parents of young homeowner adults, classified as aged 18 to 38, helped their children when they bought the property.” 

Since housing prices have steadily increased over the years, homeownership is essentially not in the cards for most younger Canadians without some windfall or support. 

Although many parents have stepped up to the task, the actual process of gifting a down payment in Canada isn’t as clear-cut as it may seem. Contrary to what this author thought — it isn’t just taking cash out of one account and transferring it to your child’s account. Shockingly, it is not just withdrawing the total amount or putting it in a bag with a dollar sign emblazoned on it.  

There are, unsurprisingly, some considerations to make when giving or receiving the cash that will be used as a downpayment on a mortgage. In this blog, we’ll dive into what you need to know about gifting a down payment to a loved one and how to navigate legal and tax implications. On the flip side, if you are on the receiving end of a sizable gifted cash amount, we’ll walk you through the process and what you need to do when gifted funds for a down payment.

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How to legally gift money in Canada

While anyone can give money to whomever they want, when it comes to gifting money for a down payment, it should come from an immediate family member. This typically comes from a parent or a grandparent. In other cases, it can come from a child or a sibling.

In most cases, these larger monetary gifts should come from direct family vs. a loved one or friend from outside the home. When applying for a conventional mortgage, mortgage lenders typically prefer financial gifts from immediate family vs. those outside of the family. Some lenders consider different types of income and investments when qualifying for a loan (like Fraction!). 

Gifts from distant relatives may be accepted, but it is up to the lender to accept and up to you to prove your relationship. Since some lenders may dig in and require proof that the money came from the gifter’s bank account vs. the distant relative, you may have to find a way around it. One way is to get a distant relative to give the down payment gift to your immediate family, who then, in turn, gives it to you for your mortgage. 

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What is considered a proof of funds? 

As you apply for your mortgage, your lender will ask for various documents. If you are receiving a gift as part of your down payment, your lender will request that you provide documentation, such as a transfer receipt, which can be found on a bank statement.

They will also request that the donor of the gift submit proof, which can include any bank records with the transfer transaction numbers to show the source of the funds. These documents can show that money is a real, no-strings attached, no repayment-needed gift. 

If a borrower receives money from a family member overseas, you may be required to provide more in-depth documentation. Make sure to plan and keep all correspondence, financial information, and agreements to provide the source of your funds, if needed.

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How much can I give to a loved one for a down payment?

When gifting a family member with a down payment, there is essentially no limit to what you can give. Most typically enough to reach 20% down to avoid increased costs and risks. Depending on the financial situation of the gifter, they may be able to give their loved one the entire down payment amount or help supplement what they have to help them achieve the whole down payment amount. 

If the entire amount is gifted and the borrower is self-employed, they must put up to 5% down of the total home price themselves.

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How can I help my child buy their first home?

Here are some pointers if you’re a parent or grandparent looking to help your loved one purchase their first (or second) home but are unsure how to do so. 

There are options you can consider depending on your financial situation. Here are two:

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1. Using your home equity to help your child. 

Suppose you have built up a certain amount of home equity in your home. In that case, you can take out a Home Equity Loan or a Fraction Mortgage to pull out up to $1.5 million in untaxed cash to not only pay off and consolidate your mortgage but also help your loved one achieve their biggest dreams and milestones. 

Here’s how you find out how much equity you have built up in your home.

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2. Co-own the house. 

Investing in a property together means that your child gets a place to live, you get peace of mind, and when it is time for them to sell, you get your money back.

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Are gifted down payments taxed in Canada?

Thankfully, there are no taxes on gifted down payment money in Canada. No matter how much you give, neither the giver nor the receiver of the gifted amount would need to pay taxes. 

Gift vs. loan

A gift of a down payment is just that — a gift. The donor must not expect repayment and must legally certify that. If you want to loan money to your child with an end goal of repayment, the amount given would not be considered a gift. It would be seen as an investment and, therefore, would be subject to relevant taxes. A loan would also impact the recipient’s total debt service and mortgage application. 

It will still be considered a gift if the donor gives the recipient cash from borrowed funds. These include HELOCs, Fraction Mortgages, or even reverse mortgages. Given that the donor would be borrowing and not the recipient, and the donor would have to pay the amount and interest on their own, this would not be considered a loan. 

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What is a gift letter?

Now that you understand how gifting a down payment works (as both a recipient and a receiver), it’s time to discuss the gift letter. 

When gifting money for a down payment, you must provide what is known as a gift letter. As we stated above, the lender will want to see where the gifted money is from, the total gifted amount and if it is a gift with no obligation to be paid back. A mortgage gift letter clearly states all the above and is provided to the lender when requested. 

With the mortgage gift letter, the recipient of the gift may be able to secure a mortgage. 

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What to include in your mortgage gift letter

Here’s what is included in a gift letter:

• Gift recipient name 
• Gifter’s name and their relationship to the recipient 
• The total amount of money gifted
• Date of gift
• Clearly outlined expectations and a statement confirming that the funds are a gift to be used for a down payment with no repayment obligation. 

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What you need to consider before gifting a down payment 

Being in a position to help your loved ones achieve their dreams is a valiant idea indeed. But before you enter into anything, there are some things you must consider.

Remember that these are no-strings-attached gifts with no repayment expectations. That means that before you extend yourself, you must be able to shoulder the cost of giving the gift in the first place. Ensure all involved understand the realities and expectations.

Further, the gifted amount is just monetary and does not necessarily guarantee a home. The giftee must still apply, be approved, and have the financial credentials to meet the criteria set out by the lender. If the recipient does not have all of the above, no amount of gifted down payment money will be able to help. The gifted amount will help them get to that idea of a home, but it is up to them to maintain their monthly mortgage payments and the property (including repairs and upkeep).

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Use your home equity to give your child the support they need

For many across the country, a gifted down payment is the only way they are going to be able to get into homeownership. Understanding the ins and outs of gifting or accepting gifted money when applying for mortgages is a vital step in a Canadian homeowner’s journey.

As a home equity lender, we’ve helped many Canadian parents and their children achieve their dreams and have been recognized for our fairness and flexibility. 

A Fraction Mortgage is a more flexible option for homeowners who want to help their loved ones. With more open qualifications, no age restrictions, shorter terms, and no exit penalties, a Fraction Mortgage allows you to access your equity without monthly payments — all without locking you into a long-term commitment. 

Learn more today! 

Disclaimer: This article’s information is general and not meant to be taken as financial advice, legal advice, or any other sort of professional guidance. While the information in this article is intended to be accurate at the time of publishing, the complexity and evolving nature of these subjects can mean that information needs to be corrected or updated, or it may not apply to your jurisdiction. Please consult a qualified professional to discuss your specific financial or retirement situation and confirm any information.