A question I often find myself getting is: “Should I give money to my kids now?” I appreciate the sentiment, why wait until you pass away after all if your goal is for your family to get your assets when you pass, you can help your family members now and see them enjoy the gift. Additionally, there are tax advantages to gifting money before you die, however, it’s a nuanced strategy. Let’s go ahead and tackle a few details.
A clear starting point to consider is your needs. Generally, this strategy makes the most sense when you are already a few years into retirement. By then, you should have a pretty good idea of what your budget is and how much you’ll need month to month. Having a good idea of your budget allows you to make reasonable forecasts and ensures you won’t need the funds you’re gifting. From a tax perspective this strategy is usually most beneficial if you have non-registered money. Most of the acronym soup of the financial world is for registered accounts: RRSP, RRIF, TFSA, LIRA, LIF, PRIF, etc – are all registered accounts. If you have money invested outside of a registered account, it is pretty much a “pay as you go” system for tax. Every year, you have to pay tax on the interest, dividends and realized capital gains from that account. If you give some of those funds away, since its no longer your money, you won’t have to pay the tax on those funds. Gifting non-registered funds can help lower your income. Having a lower income can help with income tested benefits, for example, the Old age Security (OAS) pension is clawed back once your income is above a certain threshold. A benefit of gifting non-registered money is that it could lower your income and keep you below the OAS claw-back threshold. In addition, with non-registered accounts, you aren’t permitted to name a beneficiary. With registered accounts, you can name the beneficiary and when you pass, the money bypasses your estate and goes directly to that person. You cannot name a beneficiary for non-registered investments, which means when you pass, the money in those accounts will go through your estate and could be subject to legal fees and probate. However, you are able to gift funds prior to passing. For example, if your goal was for your money to go equally to your son and daughter, if the funds are in a non-registered account, once you pass away, the money will be part of your estate and legal and probate fees could apply. However, prior to your passing, you could give some of the money in your non-registered account to your kids. Since its no longer your money, when you pass, those funds will not go through your estate and won’t be subject to legal and probate fees. The above strategy can only be considered because there isn’t any gift tax in Canada. You are allowed to give people cash, there is no limit either, you can gift as much or as little as you’d like. Of course, there are some hiccups that can occur, it’s never that simple. The above discussion assumes you’re giving cash, if you give an asset, there could be a deemed disposition which could create taxes. For example, instead of giving your son cash, you gift him 100 shares of Apple stock, even though you give those shares away, from a tax perspective, it will be treated as if you sold them for the current market value, which means you could end up with a capital gain. Also, there are attribution rules which have to be considered. If you give cash to a minor child or spouse and they use that cash to buy an asset, the income and capital gains from that asset could come back to you, you’d be stuck with the tax bill. So, even though they own the asset, since you provided the cash, you’d have to pay the tax. Attribution rules do not apply to adult children. Gifting cash to adult children is generally the best bet, since it avoids a deemed disposition and attribution rules. Of course, before going with any strategy, speak to your financial advisor to determine what works best for your financial plan. Clinton Orr is a financial professional operating out of Winnipeg, Manitoba. He provides professional counsel for his clients' portfolios so they can reach their financial dreams. Clinton Orr also writes for his community paper, the Clipper Weekly, which covers topics and events from across Winnipeg. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning https://advisorweb.cgf.com/content/uploads/sites/67/Financial-Focus-A-December-2022.pdf |
AuthorClinton Orr is a Senior Wealth Advisor and Senior Portfolio Manager with Canaccord Genuity Corp. Archives
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