You may be among the growing group who hope to pass on wealth to their children during their lifetime. A recent research study showed that the majority of Canadians (63 per cent) believe it’s best to give children financial gifts while the gift or is alive.*
The ‘giving while living’ trend has significant implications for tax and estate planning – and for your own lifestyle. That’s why your first step toward making a ‘giving while living’ decision should be to take a critical look at your own finances. If you are certain your finances will allow you to make a gift, here are some other things to consider:
What should I give? The simplest answer is cash – but that may not be the best choice. When you give cash, you also give up any control over the amount you have gifted and you may not want to do that. One solution is to characterize your gift as a loan and take back a promissory note with appropriate security – that way, you can maintain a certain amount of control over the funds and the way they are used.
Another option is to give a ‘non-cash’ gift – maybe transferring stock to a child, or even the ownership of your family cottage – but, in that case, you will likely be triggering any unrealised capital gains. For example, if the gifted stock or cottage has appreciated significantly in value, most of that value will be subject to an immediate capital gains tax (currently the taxable amount is 50 per cent of the appreciated value).
Selling the ‘gift’ for $1 does not solve the tax problem and may, in fact, make it worse. When assets are given to someone ‘at arm’s length’, the Canada Revenue Agency (CRA) deems that the donor received Fair Market Value (FMV) for the asset, no matter what it was sold for.
Should I put conditions on the gift? You can – some parents elect to ‘gift’ assets but only under certain clearly stated conditions. For example, you may want the funds back in the event of a marriage breakdown or if your child predeceases you and you don’t want one of their heirs (perhaps a new spouse) to receive the funds. Any conditions like these should be specifically set out in writing. You should also check with a lawyer to ensure your wishes are legally binding.
Can I give a gift to a minor? Yes, and if it’s a small gift, that’s pretty straightforward. But if the gift is significant it may be wise to wait. For instance, a minor can’t invest funds in their own name so future use of the gift can become problematic. In most cases, it’s best to make a large gift to a minor in your Will.
If you are thinking of giving while living, you should do it in the context of your overall financial and retirement goals. A professional planner or financial advisor can help you make the best decisions for your situation.
*Decima eVox telephone survey for Investors Group, October 20th and October 30th, 2006.
Noël Hemond, Pl. Fin.