The gift that keeps on giving
You likely know that wills and trusts are excellent estate planning tools that facilitate passing on wealth after we’re gone. You may be surprised to know that gifting money while you’re alive is another great option. “In Canada, we don’t have any type of gift tax at all,” says Jamie Golombek, CIBC Managing Director, Tax and Estate Planning. This means that giving money in the form of a present may be a smart way to help those who matter most.
A gift less taxing
Whether it’s for your child or grandchild, niece or nephew, gifting money has many advantages. “When we look at tax planning for the entire family, what we're trying to do is really minimize the amount of tax that the overall family pays,” Golombek advises. “So, if mom or dad is in a high tax bracket, there may be an opportunity to give funds to the kids who are in a lower tax bracket. The kids may be able to invest the funds and pay less tax than their parents. It’s important to speak to a tax advisor first, since the income attribution rules could prevent income splitting by having the income attributed and taxed back to the parents.” Another thing to consider is that any amount you give during your lifetime won’t be subject to estate administration tax (also called probate fees). “If you don't own it when you die, it's not subject to probate. So, the opportunity of giving some of your wealth away to the kids might save some probate fees as well.”
It can also help the young ones in your life pay off debt so they can save money on interest. If they’re paying down a student line of credit, a mortgage, or even just credit card debt, they’re being charged interest on those loans. By simply gifting them cash to put towards those payments, you’ll help them avoid paying more interest than necessary. Just make sure you can trust them to put it towards paying down debt. Once you give cash, you generally lose control over how the recipient chooses to spend it.
Be as generous as you want
There’s no limit on how much you can give, either in your lifetime or upon death. Golombek cautions, “although you can give as much as you wish, you should only provide amounts that you’re certain you won’t need to support your own lifestyle and goals.”
What’s the best way to gift money?
Cash is probably the easiest gift to make, whether by writing a cheque, or sending a wire transfer or e-transfer. Alternatively, you may consider making a gift of property in-kind. For example, you may wish to transfer securities from your account to your child’s account or transfer legal title of real estate to your kids. Be sure to speak with tax and legal advisors prior to making gifts of property in-kind, or cash.
Will I pay tax when I make my gift?
It’s important to remember that taxes may arise depending on what you give away. “When you make a gift of assets in-kind, you’ll generally be treated as if you have sold the gifted property at fair market value (FMV) and you’ll pay tax on 50% of capital gains (the difference between the FMV and the cost) in non-registered accounts.” While there will be no tax on a sale of assets within a registered plan, funds taken from an RRSP or RRIF to fund a gift will be taxed at your marginal tax rate. A withdrawal from your TFSA will be tax-free and the withdrawal value will generally be added to your TFSA contribution room for the following calendar year.
Will there be tax in other countries on my gifts?
Other countries may have gift, estate or inheritance taxes and probate fees which could apply to your gifts, even if you and the recipients of your gift(s) live in Canada. For example, US taxes may apply for US citizens who make gifts, and probate fees can apply to real estate held in other countries (or even other provinces or territories).
If you’d like to learn more about gifting money as a way of passing wealth to the next generation, reach out to me. I’d be happy to discuss some of the ways you can help to set your loved ones up for financial success.