I had dinner with my family last weekend. At the dinner conversation, my aunt was asking us how expensive it was to purchase a property in Oakville, where I live.
Her friend’s daughter and niece are both in Sheridan College for a five year program. Sheridan College is just up the street from our office in Oakville.
Each of them pays $1,500 per month to live in the residence. No food is provided.
Sounds expensive, but as my husband pointed out, they were likely paying for 8 months of the year.
Coincidentally, my other aunt is considering buying a property in her adult child’s name.
It got me thinking, “if you were to purchase a property for your kids in College/University to live in, what is the best way to structure the ownership?”
Ultimately, you can have many options available. It comes down to (1) kids owning it; (2) you own it or (3) a family trust owns it
Let’s explore all three of these options together.
(1) Kids to own the student rental in their names
Kids can own the student rentals themselves – assuming that they are over the age of 18.
Tax Incentives
The biggest tax benefit is that the adult children would be able to leverage the first-time home buyers tax credit ($10,000 tax credit which is equivalent to $1,500 tax savings) and land transfer tax refunds for the first-time home buyers (in Ontario).
Presumably, the adult children can also leverage the Home Buyers Plan (available if they have contributed to Registered Retirement Saving Plans) and the up and coming Tax free First Home Savings Account to purchase their first home. Loads of incentives available.
Rental Income & Expenses
If the kids also rent out a portion of this home to school friends, they are required to report the rental income and the proportional expenses.
The adult children cannot deduct their share of expenses against the rental income they receive.
As an example, if the adult child leases out 80% of the property to a roommate to share at fair market value rent, the adult child would be claiming the rent he/she receives from his/her roommate, deducting only 80% of the rental expenses, including but not limited to property tax, insurance, utilities, mortgage interest, etc.
The non-deductible portion of the expenses represent personal use portion of the home. Not eligible for a deduction as that portion of the expenses are considered personal.
Capital Gain on Disposition
When the property is disposed, the adult child has the obligation to report the capital gain realized on the rental portion of the property, assuming that the rental portion is significant.
Continuing with the same example above, assuming 80% of the property has been rented out, the adult child would have to report 80% of the capital gain on his/her personal tax return upon disposition of the property.
He/she can only claim primary residence exemption on 20% of the property – as he/she only occupies 20% of the property.
Presumably, if the property is disposed of when the adult child completes school, he/she would have lower income at the beginning of his/her career. Even if he/she reports capital gain on the rental portion of the property, it would have been savings compared to reporting the disposal on the parents’ tax return.
Financing
Chances are, the adult children have no or minimal amount of job income prior to his/her enrollment in university or college.
In most situation, the parents would need to provide a personal guarantee on the mortgage. On some occasions, the parents would have to go on title just to qualify for financing. To maximize the tax benefits, it’s advisable to properly document this intention.
Again, make sure to consult with someone who knows your situation so that you have the proper documentation from the beginning so that there are no surprises down the road.
Control
If the title of the property belongs to the adult children, they have the right and responsibility of any owners.
They have legal rights to sell the property and realize the profit and keep the money in their own bank accounts.
(2) Parents own student rental
Similar to other types of investment properties, the parents can choose to own the student rentals themselves.
The consideration as to whether the parents should own the properties in their own names or in corporation, it goes back to many different criteria that I am not going to repeat here.
The parents would not get to use any of the tax incentives mentioned above. On a brighter side though, the adult children will still have those incentives available when they do decide to purchase their very first home.
Rental income & Expenses
If the adult children are using the student rental without paying any rent, similar to the situation mentioned above, the expenses related to the personal use portion of the property are not deductible.
Using the same example as above, 80% of the property is rented to arm’s length parties and 20% of the property is used by the adult child, the parents need to report 100% of the rental income received from the arm’s length tenants and they can only deduct 80% of the expenses such as property taxes, mortgage interest, home insurance, utilities etc.
If the adult children are using the student rental by paying rent and it results in a rental loss, the loss can be denied by CRA – as you and your adult children are not acting at arm’s length.
If the property is held in a corporation, it may be advisable for the kids to pay rent into the corporation to avoid shareholder benefit implications.
It can be messy. Consult your accountant for the best way to structure it before making the final decision.
Capital Gain on Disposition
When the property is disposed of, the parents are responsible for reporting the capital gain on 100% of the property.
If the property is held personally, parents report 100% of the capital gain on personal tax returns. If the property is held in the corporation, the corporation reports 100% of the capital gain on the corporation tax return.
Even though the adult children live in the property, the parents who are the owners of the property are still responsible for reporting 100% of the capital gain on sale of the property.
Financing & Control
It can potentially be easier to get financing when the property is held in the parents’ name. Many banks have a secondary home program available that allow parents to purchase properties for their kids to use at school.
Since the title belongs to the parents or the parents’ corporation, the parents are in full control of the property.
(3) Family Trust
If you feel that the options above are still missing something for your family planning, you may want to consider using family trust – which allow you to maintain control and leverage some tax savings on sale of property.
Family trust, however, must be used with caution given rental properties could potentially be considered a business and tax on split income could be applied on the rental income and expenses.
Financing may still be a challenge, depending on the mortgage brokers and banks that you work with.
Make sure you consult with a professional accountant and lawyer to make sure this is something that’s suitable for you.
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Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
