The largest wealth transfer in our history is underway, with baby boomers currently handing over hundreds of millions of dollars to the next generation. Along with this, homeownership has become one of the most popular topics of conversation at family gatherings. The context therefore encourages more and more parents and grandparents to consider donations during their lifetime, rather than postponing them until their death.
Creativity and family support are admirable. However, it is relevant to remember that the inter vivos donation should be made if and only if the donor’s own financial security is assured. In some families, significant assets only require consideration of the most effective strategies for organizing gifts. But in others, much more numerous, it is imperative to simulate the disbursement of assets and to validate the solidity of the different scenarios before embarking on such an undertaking.
This step confirms that the targeted donation(s) will not excessively increase the risks associated with retirement for the generous parent or grandparent. We are talking here about the risks associated with market returns, but also with inflation and the longevity of the donor. Without forgetting the fact that this gift must indeed come from the heart, and not have been obtained under threat. Financial elder abuse exists. And it takes all kinds of forms, sometimes difficult to recognize as such.
Immediate donation, immediate tax bill for the donor
Let us assume that there is no doubt about the feasibility of the donation. The first and simplest option will be to make a monetary donation, since the donation is then tax-free for the beneficiary. On the other hand, if the capital used for this gift is in registered retirement savings plan (RRSP) or locked-in retirement account (LIRA) type investments, the withdrawal will be fully taxable in the year of withdrawal. Even in the case of non-registered investments, a taxable capital gain will also have to be considered.
Thus, it must be considered, at a second level, that the increase in taxable income following these transactions can limit access to different socio-fiscal programs. The real value of the gift may be greater than you think.
Perhaps you have also considered donating assets rather than the agent to, at the same time, limit your personal taxation? I must put an end to this hope immediately by reminding you—or probably introducing you—to the rules of attribution. These aim to limit income splitting between related persons within the meaning of the Income Tax Act (LIR).
Take, for example, the case of an adult child to whom you wish to give rental property, such as an income property. If the gift is pure, there will be no attribution and the child will be taxed on the associated income. But if you think you are being fair to your other children and lend this property at a low interest rate until the estate is settled, you will remain the taxpayer taxed on the rental income. Before thinking about making fire sales to your children or giving away property held by a company, it is imperative to consult your tax experts because there can be many potential unpleasant surprises.
Finally, even in the case of a pure gift of real estate, the LIR provides that it is presumed to be made at the fair market value of the property and its disposition will trigger the capital gain realized, whether you received or not a monetary consideration. You must again plan for cash in order to pay taxes the following year when filing your income tax return, unless it is your primary residence.
Beware of blind spots for the donee
Let’s take the typical case of a monetary donation for the acquisition of a first residence. A situation currently considered in many families. Do you want to give thousands of dollars for a down payment to your child for a joint purchase with their loved one? This idea, although generous, is worth thinking about. First from a legal perspective, it does not matter whether the child is a common-law partner or married, the gift must be documented to find it in the event of a stormy separation in the future. A personalized joint ownership agreement should be signed if access to your child’s property absolutely requires this gift.
Depending on your heirs’ borrowing capacity, it could be more profitable for the donee to invest this amount in their tax-free savings account (TFSA) and jointly borrow more against the new property. Finally, having the ability to offer a large sum immediately as a gift to your children for access to property does not mean that this transaction is the most appropriate for them in the short term. In many cases, preparing the down payment over several years using the new tax-free savings account for the purchase of a first property (CELIAPP) and its tax savings could be more advantageous than buy faster.
What you need to remember here is that the gift during your lifetime should not be generated on impulse, but carefully planned in addition to solid estate planning.
Financial planner, Sandy Lachapelle is president of the independent firm Lachapelle Intelligent Finances.