Many buyers in this market, whether they are first time home owners or not, need help with qualifying for mortgage financing. One common way of achieving this is by adding parents or other family members to their mortgage applications, which often means also adding those family members on title to their new home. In these situations, the beneficial or “real” owners of the property may be the couple or individual who signs the Agreement of Purchase and Sale for the home, but for legal or title related purposes, the owners will include the family members who’s names appear on the mortgage. In many cases, the family members will have no duties or responsibilities toward the home, nor the payment of the mortgage loan (although, there will be personal liability as a result of the mortgage loan, which I will discuss in a future blog). They are simply there in name only. We can characterize this type of relationship as a trust relationship, where the family member stands as a bare trustee with no beneficial ownership interest in the home.
In the future, when the true owners have enough credit or financial resources to take on a mortgage loan on their own, the family member can transfer title to the true owners. However, Land Transfer Taxes need to be considered, as this will appear as a disposition of an interest in property. Fortunately, we have a mechanism for avoiding the payment (again) of Land Transfer Taxes at the time of this subsequent transfer to the true owners, if there is evidence that the family member held title merely as bare trustee. Therefore, with the subsequent transfer, there is no change in the beneficial or real ownership of the property, hence no disposition of interest in the property. The evidence required is often in the form of a Statutory Declaration executed by the trustee family members at or shortly after the home is first purchased. It is important to have this evidence created at that time, for two reasons: 1) the trust arrangement appears more genuine; and 2) without such evidence, there may be nothing to stop the family member from claiming an actual beneficial interest in the home based on their legal or title interests.A good lawyer will alert their client to this issue at the time of the initial purchase, and can draft the required declarations then and when title to the property is later transferred.