How Adding Your Child to a Rental Property Affects Your Taxes

Ask MoneySense

My husband has a rental property. As part of our estate planning, he has decided to add our daughter’s name to the title on June 1, 2024, to avoid the increased capital gains inclusion rate.

By adding our daughter’s name, he’s considered to have sold half the house. The adjusted cost base was $120,000 and the appraised value was $1,500,000. So the capital gains would be $1,380,000. Fifty percent of that would be $690,000 as the inclusion value. Since he only sold half the house, his capital gains would be $345,000. He has a $100,000 crystallized exemption from 1994. When is the $100,000 deducted? Is it deducted from the $690,000 amount or the $345,000?

—Flo

Our child’s name is now on title—what will we pay in capital gains tax?

Adding a child’s name to a rental property can trigger significant tax consequences. Whether a taxable event has occurred depends on whether beneficial ownership was transferred or whether only the name on title changed. Below I explain the key concepts you need to understand, outline potential outcomes for your situation, and recommend next steps.

Gifting part of a rental property: legal vs. beneficial ownership

There’s an important legal distinction between legal ownership (whose name appears on the land title) and beneficial ownership (who actually owns the asset for tax and economic purposes). Simply putting a child’s name on title does not always result in a taxable disposition. If the original owner retains beneficial ownership—keeps control and continues to receive income—the transfer may not be treated as a sale or deemed disposition for tax purposes.

However, if you intended to give the child an ownership interest and that intention is reflected in documents or actions (for example, sharing rental income or formally transferring half the beneficial interest), tax authorities may consider this a deemed disposition. That deemed disposition is treated like a partial sale at fair market value and can create capital gains that must be reported.

There are also non-tax risks to consider when adding a child to title: creditor claims against the child, potential consequences in family law if the child divorces, and reduced control over the asset. Depending on your goals, alternatives such as a power of attorney, a trust, or other estate planning tools may offer safer results.

Was there a deemed disposition in your case?

If your husband documented an intention to transfer half the beneficial interest—through a lawyer’s instructions, a declared gift, or by splitting rental income—then a deemed disposition likely occurred at the fair market value on the date of transfer. That means he effectively “sold” half the property and must report the resulting capital gain on his tax return for the following tax year.

If, instead, the daughter was added to title for convenience but no beneficial ownership changed, there may be no immediate tax event. Determining which situation applies will require reviewing the documentation and the facts surrounding the addition to title.

How the increased capital gains inclusion rate affects the outcome

On June 25, 2024, the inclusion rate for individuals increased for capital gains above certain thresholds. That change can impact the taxable portion of gains realized on property transfers. If a deemed disposition occurs in a year affected by a higher inclusion rate, a larger portion of the capital gain may be taxable compared with prior rules.

Because rules and thresholds can change, accelerating a disposition to avoid a future rate increase may not always be beneficial. Paying tax earlier than necessary can reduce flexibility and could lead to a larger immediate tax bill. If your husband intended to hold the property for many years or planned estate strategies such as leaving property to a surviving spouse on a tax-deferred rollover, accelerating a gain now could be disadvantageous.

It’s important to consider alternate strategies. For example, in some situations a deceased owner’s final return can be used to report a partial gain to adjust the adjusted cost base for the surviving spouse, which may be more tax-efficient than crystallizing gains during life.

The 1994 lifetime capital gains exemption and adjusted cost base

There used to be an election that allowed certain capital gains to be crystallized and used to increase adjusted cost base (ACB), sometimes called a lifetime capital gains exemption in older rules. If your husband made such an election in 1994 and claimed a $100,000 election, his ACB could be higher than the $120,000 you listed—potentially reducing the gain realized on any partial disposition. Renovations and other capital improvements over time also increase the ACB and lower the taxable gain.

For example, if the ACB can be credibly increased to $220,000 because of a prior election or capital improvements, the capital gain on half the property would be calculated using that higher base. The resulting tax payable depends on the final taxable gain, his overall income, and provincial tax rules.

Practical steps to take now

Confirm whether you and your husband documented a transfer of beneficial ownership or only added a name to title. Review any lawyer’s instructions, gift declarations, or changes in how rental income is allocated.
Gather records that affect the adjusted cost base: the original purchase price, records of capital improvements, and any past elections or tax filings that might have increased the ACB.
Consult a tax professional and a real estate lawyer promptly. A tax advisor can model the possible capital gains and tax payable under different scenarios; a lawyer can advise whether the title change legally transferred beneficial ownership and what remedial steps, if any, are possible.
Consider alternative estate-planning approaches if the goal was to simplify succession or minimize probate exposure—such as a spousal rollover on death, trusts, or powers of attorney—instead of outright transfer while both spouses are alive.

This is a complex situation with material tax implications. Professional legal and tax advice tailored to your exact facts is essential before taking further steps.