Tax implications of adding a child’s name to your rental property

Gifting some or all of a rental property

The act of adding a name to a property itself does not give rise to capital gains tax. There’s a distinction between legal ownership (whose name is on title) and beneficial ownership (who technically owns the property). If only legal ownership changes, and not beneficial ownership, there may not be a tax event.

For example, an elderly parent might add their child’s name to their bank account or to the title to their home. They might do this based on the perception that it will simplify dealing with the assets as they age, or in an attempt to avoid probate tax. In these situations, a power of attorney or similar estate document (depending on the province or territory) may be better. The asset may not fall outside of the estate and avoid probate if beneficial ownership remains with the parent. There can also be risks to adding a child’s name to title, including creditor issues if the child is sued, family law disputes if the parents divorce, and elder abuse given the children can access the asset.

Was there a deemed disposition?

In your case, Flo, it sounds like your husband intended to partially dispose of the property. Did he document this specifically with a lawyer, or did he just add your daughter’s name to the rental property? Is she now receiving half the rental income?

A true intention to transfer results in a deemed disposition of one-half of the property at the fair market value. It’s equal to selling part of the property, with tax payable when your husband files his tax return next year.

Dealing with the increased capital gains inclusion rate

It seems your husband added your daughter to the property title because of the increase in the capital gains inclusion rate on June 25, 2024.

Beginning on that date, the inclusion rate for individuals rose from one-half to two-thirds for a capital gain of $250,000 or more in a single year. This means two-thirds of the capital gain is taxable instead of just one-half (as was the case prior to June 25). It’s only the capital gain in excess of $250,000 that is taxable at the higher rate. (For corporations and trusts, the inclusion rate is two-thirds for all capital gains.)

You mention, Flo, that this was done for estate planning purposes. I assume you intend to hold the property for the rest of your lives. If that could be many years, it may not be advantageous to accelerate the payment of capital gains tax. Some of the capital gain will still likely be subject to the higher inclusion rate—no matter what—and paying tax earlier than you need to could be disadvantageous.

I’m raising this not as a criticism, but because you may still be able to reconsider, if you haven’t specifically documented your intention and you simply added your daughter’s name to the property title. You should do some tax calculations with your accountant and discuss the documentation of the transfer with your lawyer.

It bears mentioning that if your husband dies before you, he can leave the property to you on a tax-deferred basis. Or you can elect to trigger a partial capital gain at that time. For example, you might elect to report a $250,000 capital gain on his final tax return to bump up the adjusted cost base (ACB) for you and use his low inclusion rate.

The 1994 lifetime capital gains exemption

There was a $100,000 lifetime capital gains exemption for a number of years that ended in 1994. In that year, there was an election you could file to report a capital gain on property in order to bump up the cost base to reduce future capital gains tax.

It could mean that your husband’s $120,000 cost base could be as high as $220,000 if the property was worth at least $220,000 in 1994 and he claimed a full exemption. It bears mentioning that renovations made over the years will push up the ACB as well.

If your husband did dispose of one-half of the property when adding your daughter’s name, he would have a capital gain equal to 50% of $1,280,000 ($1,500,000 minus $220,000), which equals $640,000. This will require a massive tax payment in April 2025 that could be $150,000 or more depending on his other income and province or territory of residence.

What steps should you take?

I would start by determining if you documented a gift of beneficial ownership of half the rental property or just added your daughter’s name on title. You may still have the ability to reconsider whether to trigger a capital gain.

Seek professional legal and tax advice, as this is a complicated situation with a significant tax implication.

Read more about capital gains tax:

• Can transferring ownership of a house help avoid probate tax?

• When does the “plus 1” rule apply to a principal residence?
• How capital gains tax on property is divided in a divorce
• Capital gains when selling property to family

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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