Gift or Loan? How Parents Can Safely Help Adult Children Buy a Home

When you hand over that cheque for $50,000 or $100,000, you are making a legal decision, whether you realize it or not. Is this money a gift? Or is it a loan?

The answer matters immensely. If you get it wrong, you could accidentally expose your hard-earned savings to your child’s future divorce settlement, trigger an expensive tax bill, or even find yourself trapped in a web of accidental mortgage fraud.

At Cabinet Sauvé Law, we help families navigate this delicate balance between generosity and protection. Here is what every parent (and child) needs to know before the money moves.

This situation usually starts with a conflict between two powerful forces: The Mortgage Lender and Parental Anxiety.

To approve your child for a mortgage, the bank needs to verify the source of the down payment. Lenders are terrified of "borrowed down payments" because it means the borrower has more debt than they disclosed. If the bank sees a large transfer from parents, they will almost always require a Gift Letter. This is a formal legal document where you, the parent, must sign a statement declaring:

• "This money is a genuine gift."
• "There is no expectation of repayment."
• "No part of this money is a loan."

Privately, however, many parents are thinking: "I'm happy to help, but if they sell the house, I want that money back for my retirement," or "I don't mind giving this to my daughter, but I definitely don't want half of it going to her boyfriend if they break up next year."

We often see families try to "outsmart" the system. They sign the Gift Letter for the bank to get the mortgage approved, but then secretly have the child sign a "side" Promissory Note agreeing to pay it back. This is dangerous. By signing the Gift Letter, you have legally declared the money is not a loan. If you later try to enforce that secret Promissory Note in court, a judge will likely toss it out because you swore to the bank it was a gift. Worse: Misrepresenting the source of funds to a federally regulated lender can constitute mortgage fraud. You are effectively inducing the bank to lend money based on false information.

You do not have to choose between committing mortgage fraud and leaving your money unprotected. There are two proper legal ways to handle this.

Instead of a secret Promissory Note, you can register a formal Second Mortgage on the property title for the amount of your loan.

This is the most common and effective solution for modern families who want to keep the primary lender happy.

1. The Gift: You provide the funds as a true gift and sign the lender’s Gift Letter honestly. This satisfies the bank and gets the mortgage approved.
2. The Protection: Before the closing (or shortly after), your child and their spouse sign a Marriage Contract (or Cohabitation Agreement for unmarried couples).
3. The Clause: In this contract, the couple agrees that the $100,000 down payment came from you and, in the event of a separation, that specific amount will be returned to your child before the remaining equity is divided.

This "Domestic Contract" effectively overrides the default Family Law Act rules. It acknowledges the gift was for your child, not the marriage.

The Fix: A Cohabitation Agreement. If your child is buying a home with a girlfriend or boyfriend, a Cohabitation Agreement is essential. It can clearly state: "The down payment of $100,000 was provided by John's parents. In the event of a separation, John gets the first $100,000 of equity, and only the remaining profit is shared."

Crucially, a Cohabitation Agreement can be drafted to automatically convert into a Marriage Contract if they decide to get married later, providing seamless protection.

Lenders and lawyers are required to verify the "provenance" (origin) of all funds used in a real estate transaction.

• The 90-Day History: Lenders typically want to see a 90-day history of the bank account where the down payment is coming from.
• The "Mattress Money" Problem: If you deposit $50,000 cash into your account two weeks before closing, the bank may reject it because they cannot trace its origin.
• The Solution: If you are planning to help your child, move the funds into a clear, traceable account well in advance. Be prepared to provide your own bank statements to your child's broker to prove the money came from a legitimate source (e.g., savings, HELOC, or investment sale).

Finally, a warning for parents who think, "I'll just put my name on the title with my child to protect my investment."

In the landmark Supreme Court of Canada case Pecore v. Pecore, the court established a legal presumption regarding transfers from parents to adult children.

• The Presumption: If you give an asset to an adult child (like adding them to a deed or bank account), the law presumes you did not intend to give it to them as a gift. Instead, it presumes they are holding it in "Resulting Trust" for your estate.

Why is this a trap? If you pass away, your other children could sue, claiming that the house doesn't belong to the child who lives there, but actually belongs to your Estate (and therefore should be split among all siblings). Unless you have clear legal documentation (like a Deed of Gift) proving you intended for that child to own the home, your generous act could spark a massive family lawsuit after you are gone.