Adrian Mastracci

By Gigi Suhanic
National Post
FP Money
Saturday, October 12, 2002

Question: A son-in-law, who owns and resides in his own matrimonial home, purchases a second home for his parents-in-law to live in. The son-in-law finances the purchase via a conventional bank mortgage.

The parents-in-law have offered to reduce the financial burden (bank mortgage interest expense) and have proposed that their son-in-law discharge the bank mortgage and replace it with a mortgage loan from them at no interest.

Will the parents-in-law have any interest income attributed to them? If yes, is there any other way to effect the above without income being attributed to the parents-in-law? A gift of the mortgage principal amount to the son-in-law is not a possibility, from the parents-in-law's perspective.

Answer: In general, attribution of income applies if you lend or transfer property to a related person, including a spouse, or any person under age 18. These rules are intended to discourage income splitting, says Adrian Mastracci of KCM Wealth Management in Vancouver.

However, the second property purchased by the son-in-law will be an investment property for him. It will be subject to the tax consequences of capital gains or losses upon its sale. The bigger question is how to structure the purchase so that it produces the best results for the two families.

It appears that the parents-in-law do not own a principal residence now, or will be vacating one. Ideally, it would be preferable to arrange the purchase so that the parents-in-law could also use the principal residence exemption. Of course, all of the requirements must be satisfied for purposes of claiming the principal residence exemption.

Given that the parents-in-law want to live in the property and pay off the mortgage with their cash, a better scenario may be for them to purchase the property in the first place. This allows them to partake in the principal residence exemption when the property is sold.

I do not know their whole picture. Hence, there may be additional financial considerations for the parents-in-law if they do not have the full purchase price in cash.

If the son-in-law has already purchased the property, he should be aware that there may be some penalties in the discharge of the bank mortgage. Unless the mortgage is fully open, there will likely be at least a three-month interest penalty. Further, the mortgage may only allow a fixed amount of repayment without penalty, such as 10% to 20% per year.

As is often the case, one has to look beyond the obvious in order to take full advantage of the tax provisions.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.