Down Payment Gift Rules in Canada

Are you or your loved ones thinking of buying a house in Canada? You’re looking at an average $716,000 purchase price, which foreshadows a hefty mortgage payment. But the biggest obstacle for many Canadians is the down payment. In this example, you’d need 20% of the purchase price, or $143,200, to avoid mortgage default insurance. Pair that with inflation, and real estate investing gets that much harder. For this reason, parents and other family members sometimes gift money to their children or younger relatives to help them with the down payment. However, there are some down payment gift rules in Canada to consider, which we’ll cover with this article.

It’s no wonder so many parents decided to gift their kids with down payments, full or partial, in the last few years. Our roster of vetted and highly rated wealth management companies discuss down payment assistance and other investment strategies with individuals and families regularly. But what do gifted down payments mean for taxes and personal finances? Are the down payment gift rules in Canada enforced? We’ll cover all that and more below. But first things first:

What is a down payment?

A down payment is the upfront sum of money you pay when buying a property or other relatively expensive goods. Even car loans sometimes require down payments to lighten the monthly payments, especially if it’s a newer, more expensive model. A down payment is also one of the many requirements you need to fulfill before getting approved for a mortgage.

This year, first-time homebuyers have a harder time accessing real estate. The biggest obstacle? Down payments, according to 74% of Toronto respondents in the real estate firm Royal LePage’s survey. 

How much is a down payment?

A down payment in Canada is anywhere from 5% to 20% of the purchase price. However, if you can afford to put more down, you can exceed the 20% benchmark. The more you put down, the lower your mortgage will be and the less interest you’ll pay.

Banks require a minimum 5% down payment before considering a loan for you, but anything less than 20% forces you to take out mortgage default insurance. And if you’re looking at properties over $1 million? You have to provide a 20% down payment—no ifs, ands, or buts. 

Is there a gift tax in Canada?

No, Canada does not have a gift tax. Meaning? You could gift your kids or family members a partial down payment of $50,000 or an entire down payment of near $200,000, and you wouldn’t have to pay any tax simply for giving it. This is true on both sides, both the giver and the receiver do not have a tax obligation arising from gifted money.

Of course, you’d pay your regular income tax throughout the years to acquire money to gift. And, your kids would be responsible for paying taxes on any income the property generates and capital gains if they sell it down the road. But if we’re talking about taxes just for gifting a down payment? You don’t have to worry about any in Canada.

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Can my parents give me money to buy a house in Canada?

Yes, your parents can give you money to buy a house in Canada. You’ll see as you keep reading that, in this economy, financial support in the real estate purchase process is quite common among Canadians. Why? For starters, it helps you tap into the ever growing housing market sooner. Of course, some parents might co-sign for a mortgage loan as a way to help their children as well. But a gifted down payment is a bit less stressful, since once the money is gifted, the parents have no further obligation to their child. They won’t be responsible for any mortgage payments as a co-signer should their child default on payments.

Here are a few more things to consider surrounding down payment gift rules in Canada:

How much of a down payment can be a gift?

You can receive (or give) as much of a down payment as you’d like. Even if you could afford a portion of your down payment, extra support from parents and family members can help you avoid spending hundreds of dollars per month in mortgage insurance fees. There is no limit on how much can be gifted and no tax arises from this transaction.

If you’ve considered accepting a down payment gift, you’re not alone. Royal LePage found that 35% of Canadian first-time home buyers received support from their families for their down payments and other expenses. For another 46%, that support was a gifted down payment sum (partial or full). For 37%, it was a loan meant to be paid back to their families. 

How much can parents gift for down payment in Canada?

Parents can choose any sum they’d like to gift their children for a down payment. Lately, that average sum has been increasing, most likely in line with increasing home prices. For example, the Toronto Star highlights the average down payment gift as $52,000 in 2015. Fast forward five years later to 2020? The average is $82,000, almost double. And that creeps even higher for kids buying houses in bigger, more expensive cities like Toronto, where the average was over $130,000 in the first three quarters of 2021. 

Can I gift a down payment to a friend?

Yes, you can gift a down payment to a friend. Canada’s gift tax applies across the board, meaning it’s not only parents and related family who can comfortably gift a down payment tax-free. However, you might run into a few more housekeeping tasks from your lender. It’s more common for home buyers to receive gifted down payments from immediate family, so a friend gifting money might raise some eyebrows. At the very least, you might need to prove your relationship to the bank. Normally, this is done through a gift letter which states how much was gifted and other details surrounding the transaction, but more on that later.

But even then? We strongly recommend you take lots of time to consider your relationship with your friend before you gift them with down payment support. It’s hard enough buying a house in Canada, and you might make it difficult for yourself or children down the line to do so if you gift money to a friend. The contrary is true as well, think before accepting significant money from a friend for a down payment. Money can complicate friendships, so be sure to think it through first!

What if you loaned the down payment to a friend? Again—nobody here is stopping you—but the stats are against you. Studies find that over half of the time, something goes wrong when you lend money to a loved one. A savvy wealth manager would advise that you find some sort of collateral or other assurance that you’ll get the money back before you lend it.

Related Reading: Is inheritance money split in a divorce in Canada?

Does it matter if your down payment is a gift?

It depends on who you ask, but usually, no. Some people might feel timid admitting they received financial support in the form of a down payment gift—but it’s really common, along with other forms of living inheritances.

Now, does it matter to the bank? Not really, as long as the gift-giver can actually pull off the transaction. Once the transaction is processed, you might need to verify and confirm the source of the funds with the bank, but it’s a fairly simple process. We’ll get into more details about down payment gift rules in Canada in the next section.

Why does it matter if your down payment is a gift?

It doesn’t really matter if your down payment is a gift. All you need to do is make sure you fulfill lender requirements before going through with the transaction. Normally, the only extra step with a gifted down payment is to confirm the source of the funds for the bank. They often flag large, abnormal deposits and want to verify that it came from a legitimate source. But if you received it from your parents and they aren’t involved in anything dodgy, you have nothing to worry about!

Down Payment Gift Rules in Canada

Down payment gift rules in Canada comprise two things: a gift letter and proof of funds. Let’s take a closer look below.

What is a gift letter for a mortgage in Canada?

A gift letter is a document from the benefactor (gift giver) to the home buyer taking out a loan that outlines the relationship between both parties and details about the gifted money.

Your bank will want to see numbers in the gift letter like how much is being gifted, the property details and price, and personal information for the benefactor. The main point of a gift letter is to affirm that the benefactor does not want the money back. Plus that the money came from a legitimate source. Without a gift letter, some home buyers might get into spats with their families down the line and have new obligations to repay the funds. In addition, gift letters help banks verify where the money came from before extending big credit.

How do I write a down payment letter for a gift?

Here’s a quick checklist for your gift letter:

• Home buyer’s name
• Benefactor’s name and contact details
• Date of gift transaction
• Amount of gift
• Property price and address
• Brief summary of the relationship between both parties
• Affirmation the sum is a gift and not a loan
• Intended use of the gifted money (in this case, a property down payment)

Remember, some lenders might have their own structures that you’ll need to follow for gift letters. Need help crafting one? A wealth manager could help you with that.

What are proof of funds for down payment gifts in Canada?

Did you think your lender would agree to lend based on you and your benefactor’s word alone on the down payment gift? Not a chance, but proving the funds is simple enough. 

In most cases, a lender will request to see banking information proving that the benefactor actually has and sent the funds. Then, they might inquire into how the benefactor earned or received those funds as part of a money laundering prevention strategy. In other words, they want to ensure the funds weren’t generated from illegal activities. After that, the home buyer will need to show proof that the gifted down payment actually went into their account. 

Final Thoughts

Canadian real estate is getting more and more expensive and inaccessible as people struggle to attain the savings and buying power necessary to secure a down payment and mortgage. Luckily, Canada down payment gift rules in Canada are relatively lax, making it easy to gift and receive gifted down payment support within your family or close circle.

Looking for more ways to maintain, preserve, and grow your wealth? It’s never too early to discuss your life goals and financial aspirations with a wealth manager. Find a wealth manager today!

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