Why Source Verification Is Crucial When Buying a Home in Canada
When purchasing a home in Canada, your down payment is a key step—not just financially, but also from a regulatory perspective. Canadian financial institutions are required by Anti-Money Laundering (AML) laws to thoroughly verify the source of your down payment funds to ensure they come from legal and transparent sources.
AML and Canadian Mortgage Lending: What You Need to Know
In Canada, mortgage lenders and brokers must comply with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and related regulations overseen by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). These laws require lenders to:
- Confirm the legitimacy of your funds before approving a mortgage.
- Collect and keep detailed records of financial transactions.
- Report suspicious transactions that might indicate money laundering or financing of illegal activities.
Because real estate transactions involve large sums, they are a high-risk area for money laundering, making these checks particularly important.
90-Day Source of Funds Verification: What Canadian Lenders Require
Canadian lenders typically require a 90-day history of your down payment funds to meet AML compliance. This means you will need to provide:
- Bank statements showing the funds in your account over at least the last 90 days.
- Documentation for any large deposits or transfers, such as pay stubs, gift letters, sale of assets, or other proof of legitimate income.
- Explanation for any unusual account activity.
Avoid These Common Pitfalls
- Large unexplained deposits: A sudden $20,000 deposit without clear documentation will trigger lender scrutiny and possible delays.
- Multiple transfers between accounts: Moving money quickly between different bank accounts can raise concerns as an attempt to hide the real source of funds.
- Cash deposits: Cash is very difficult to verify and often requires extra proof of where it came from.
Gifted Funds in Canada: AML Considerations
If you receive a gift for your down payment, Canadian lenders require:
- The gift to come from a close family member or blood relation — parents, grandparents, siblings, or sometimes extended family.
- A gift letter that clearly states the funds are a gift, not a loan, with no expectation of repayment.
- Proof of source of the gift funds from the giver’s bank statements or financial records.
Lenders assess gifted funds carefully to make sure everything is clear and above board.
Real-World Examples of AML Compliance in Canadian Mortgage Approvals
- Example 1: A buyer received a $50,000 gift from their parent. The lender required a signed gift letter and the parent’s bank statements showing the withdrawal, ensuring the funds were legitimate.
- Example 2: A buyer transferred $15,000 from a foreign account into their Canadian bank account one week before applying for a mortgage. The lender asked for additional documentation about the origin of those funds and delayed the approval until the verification was complete.
- Example 3: A buyer deposited large amounts of cash into their account within 90 days. The lender flagged the account for AML review and required the buyer to provide receipts and source documents, causing delays.
How to Prepare Your Down Payment Funds for AML Compliance in Canada
- Maintain consistent savings: Keep your down payment money in your bank account for at least 90 days before applying.
- Document all transfers: Have paperwork ready for any gifts, asset sales, or transfers.
- Avoid cash deposits: Use traceable electronic transfers whenever possible.
- Be transparent with your lender or broker: Early communication helps prevent last-minute surprises or delays.
Conclusion
Understanding AML requirements around your down payment can save you time, stress, and potential legal issues when buying a home in Canada. Canadian lenders must verify your funds carefully to comply with the law and protect the housing market’s integrity. By preparing your funds properly and documenting their source clearly, you ensure a smooth, compliant path to homeownership