The dos and don’ts of tax-free gifts in Canada

National Post (National Edition) - - FINANCIAL POST - JAMIE GOLOMBEK Fi­nan­cial Post Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Man­ag­ing Di­rec­tor, Tax & Es­tate Plan­ning with CIBC Wealth Strate­gies Group in Toronto.

ITax Ex­pert f you’ve ever con­sid­ered mak­ing a sig­nif­i­cant fi­nan­cial gift to your chil­dren, you’re not alone. A re­cent CIBC poll of 3,021 ran­domly se­lected Cana­dian adults found that the ma­jor­ity (76 per cent) of Cana­dian par­ents with a child 18 years or older would give their kids a fi­nan­cial boost to help them move out, get mar­ried, or move in with a part­ner.

Once you de­cide to give, how­ever, the next ques­tion is how much should you give, what form should your gift take and what are the tax, and in some cases, fam­ily law con­sid­er­a­tions and op­por­tu­ni­ties as­so­ci­ated with mak­ing a gift.

For starters, cash is prob­a­bly the most com­mon way gifts are made but you may also con­sider mak­ing a gift of prop­erty “in-kind” such as, per­haps, a gift of se­cu­ri­ties from your ac­count to your child’s ac­count or a gift of real es­tate to your kids.

Canada gen­er­ally has no rules lim­it­ing how much you can give, either in your life­time or upon death and while you can give as much as you wish, be sure to only give only amounts that you are cer­tain you won’t need to sup­port your own life­style and goals. Af­ter all, the big­gest prob­lem with mak­ing a gift is that it can be dif­fi­cult to get it back later so best to avoid de­plet­ing funds that you may need for your­self (and your spouse or part­ner) dur­ing your life­time.

There are two main types of gifts: “in­ter-vivos” gifts, mean­ing gifts made dur­ing your life­time, or “tes­ta­men­tary” gifts which are given upon death. By mak­ing gifts dur­ing your life­time, you will of­ten be able to see your ben­e­fi­cia­ries en­joy­ing your gifts and there may even be op­por­tu­ni­ties for tax sav­ings.

The poll found that many Cana­di­ans were con­fused about the taxes as­so­ci­ated with mak­ing a gift, with over half ad­mit­ting they sim­ply didn’t know what taxes ex­ist on a fi­nan­cial gift to a child or rel­a­tive, while nearly 10 per cent be­lieved that the gifts were po­ten­tially tax­able to the re­cip­i­ent.

While gifts them­selves are, in­deed, re­ceived tax-free, it is im­por­tant to keep in mind that there can be taxes aris­ing de­pend­ing on what is given away. When you make a gift of as­sets “in-kind,” such as ap­pre­ci­ated se­cu­ri­ties or real es­tate, you will gen­er­ally be treated as if you have sold the gifted prop­erty at fair mar­ket value and you will pay tax on 50 per cent of cap­i­tal gains.

There are, how­ever, some ex­cep­tions to this rule. For ex­am­ple, if you make an in-kind gift to your spouse or com­mon-law part­ner, there is an au­to­matic “rollover” at the prop­erty’s tax cost or ad­justed cost base (ACB). This pro­vides a de­fer­ral of tax on any ac­crued cap­i­tal gain to the date of the gift, although, un­der the spousal at­tri­bu­tion rule to pre­vent in­come split­ting, you will pay tax on any cap­i­tal gain when the prop­erty is ul­ti­mately sold by your spouse or com­mon-law part­ner. You will also con­tinue to be re­spon­si­ble for the tax on any fu­ture in­come earned on the gifted prop­erty.

While gift re­cip­i­ents won’t pay any in­come tax on the gifts they re­ceive, a re­cip­i­ent of your gift will pay tax on any fu­ture in­come that is earned on the gifted funds, which may pro­vide op­por­tu­ni­ties to in­come split and save tax for many years to come.

For ex­am­ple, sup­pose you pay tax at a mar­ginal rate of 50 per cent and your adult daugh­ter pays tax at a mar­ginal rate of 20 per cent. If you make a gift to your adult daugh­ter of $100,000 and she in­vests the funds to earn 5 per cent in­come an­nu­ally, the over­all tax sav­ings for your fam­ily each year could be $1,500: $100,000 x 5 per cent x (50 per cent – 20 per cent).

Note that the new anti-in­come sprin­kling rules in­tro­duced last week by Fi­nance Min­is­ter Bill Morneau do not af­fect this type of tax plan­ning where a bona fide gift is made from a par­ent to some­one over the age of 18. The new rules, which are aimed at var­i­ous in­come sprin­kling strate­gies done via a pri­vate cor­po­ra­tion, ap­ply even to adult rel­a­tives, such as si­b­lings, chil­dren, un­cles, aunts, or nieces and neph­ews.

Gift­ing may also save you some taxes upon death as most prov­inces levy an es­tate ad­min­is­tra­tion tax or pro­bate fee of up to 1.7 per cent of the as­sets in your es­tate (de­pend­ing on your prov­ince). This could de­crease the amount avail­able to your ben­e­fi­cia­ries. By gift­ing as­sets be­fore you die, these as­sets will not be sub­ject to pro­bate fees be­cause they will not be part of your es­tate.

When you trans­fer prop­erty di­rectly to the re­cip­i­ent, you usu­ally lose con­trol over how the re­cip­i­ent uses prop­erty. If you want to main­tain some mea­sure of con­trol re­gard­ing the use of funds af­ter you make the gift, you could con­sider es­tab­lish­ing a trust. To cre­ate a trust, you could trans­fer as­sets to a trustee who will man­age the as­sets on be­half of the ul­ti­mate re­cip­i­ents (ben­e­fi­cia­ries). Through the trust agree­ment, you may spec­ify tim­ing and amount of dis­tri­bu­tions to ben­e­fi­cia­ries, which may be par­tic­u­larly use­ful for spendthrift or in­ca­pac­i­tated ben­e­fi­cia­ries, who may not have the re­spon­si­bil­ity or ca­pac­ity to man­age funds them­selves. Use of a trust is more com­plex than an out­right gift and you should def­i­nitely seek the ad­vice of a lawyer who spe­cial­izes in trusts to de­ter­mine if a trust is right for you.

In some cases, a trust may also help to pro­tect the gifted amount from cred­i­tor or spousal claims against gift re­cip­i­ents, as could tak­ing back a promissory note that is payable on de­mand. In­deed a com­mon strat­egy when par­ents want to help a child pur­chase a home but wish to pro­tect those funds in case of mar­i­tal break­down is for the par­ents to struc­ture the “gift” as a loan, se­cured by a non-in­ter­est bear­ing mort­gage on the prop­erty. This mort­gage can then be for­given at some later date or even upon death, if de­sired.

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