Buying a Home From Your Parents Below Market Value in Canada

Under OSFI Guideline B-20, federally regulated lenders must use the lesser of the purchase price or appraised value for LTV on arm's-length transactions. For non-arm's-length transactions — which explicitly include sales between family members — lenders use the appraised value as the property value basis regardless of the agreed price. The discount between the agreed price and appraised value is treated as gifted equity and counts toward the borrower's down payment. In the worked example, the child's $32,000 cash plus $160,000 gifted equity equals $192,000 — 24% of the $800,000 appraised value — producing a conventional (uninsured) mortgage at 76% LTV. No CMHC premium applies because LTV is below 80%.

CMHC, Sagen, and Canada Guaranty all classify intra-family sales as non-arm's-length transactions and apply heightened documentation requirements. An independent appraisal ordered by the lender (not the borrower) is mandatory — a realtor CMA or owner estimate is not acceptable. The gifted equity must be confirmed by a gift letter from the selling parent stating no repayment is expected, consistent with the standard gifted down-payment framework. If the resulting LTV after gifted equity exceeds 80%, the mortgage becomes high-ratio and CMHC insurance applies at the standard premium tiers (4.00% at 90.01–95% LTV, 3.10% at 85.01–90%, 2.80% at 80.01–85%). The December 2024 reform raising the insured cap to $1.5M means properties up to that threshold can still access insured financing if LTV warrants it.

CRA's deemed disposition rule under the Income Tax Act treats any transfer of property between non-arm's-length parties as occurring at fair market value, regardless of the agreed price. The parent cannot reduce their proceeds below FMV to minimize capital gains. If the property was the parent's principal residence for every year of ownership, the principal residence exemption (PRE) shelters the entire gain and no tax is owed. If the parent owned the property for years during which it was not their principal residence — for example, a rental period or a secondary property — the unsheltered portion of the $500,000 gain is included in income at the applicable inclusion rate. As of 2025, the federal capital gains inclusion rate is 2/3 for gains above $250,000 annually for individuals (the 2024 budget proposal). Legal and tax advice is essential before setting the sale price.

The gifted equity letter must be signed by the selling parent, addressed to the lender, and state: (1) the dollar amount of the gift, (2) that it represents the difference between the agreed sale price and the appraised FMV, (3) that no repayment is required or expected, and (4) that the gift is not a loan secured against the property. Most lenders also require the gift to be reflected in the Agreement of Purchase and Sale — the sale price and the gifted equity amount must reconcile to the appraised value. Some lenders require the gift letter to be notarized; others accept a witnessed signature. Confirm the lender's specific format before drafting. The child's own cash contribution (here, $32,000) must be verified by 90 days of bank statements showing the funds were not borrowed.

Land transfer tax (LTT) is calculated on the agreed sale price in most provinces, not the appraised value — a meaningful saving when the discount is large. In Ontario, the provincial and Toronto municipal LTT rebates for first-time buyers apply to the first $368,000 and $400,000 of purchase price respectively, and the child qualifies as a first-time buyer if they have never owned a principal residence. British Columbia's Property Transfer Tax applies to the fair market value, not the agreed price, which eliminates the LTT saving on the discount in BC. Quebec and Alberta use the agreed price. Confirm the applicable provincial rule with a real estate lawyer before finalizing the sale price.

The child qualifies for the mortgage on their own income and credit profile — the parent's financial strength is irrelevant unless they co-sign. The stress test under B-20 applies at the greater of the contract rate plus 200 bps or 5.25% (the current floor as of 2026). At a 5-year fixed rate of approximately 5.00–5.25%, the qualifying rate is 7.00–7.25%. GDS and TDS limits are 39% and 44% respectively for insured mortgages; uninsured lenders typically apply the same ratios but have more discretion. If the child's income alone cannot service the mortgage, a co-signer or guarantor arrangement is possible, but the parent-seller cannot simultaneously be the co-signer on the same transaction at most lenders — this creates a conflict-of-interest flag in underwriting.