Gifting your RRIF to your kids

Gifting money to children and inheritance planning are very personal choices.

Some people prefer to keep control of their assets until they pass on (and even control what happens after they pass), while others like the idea of passing some money on now while their kids can use it most and they can be around to see them enjoy it.

I’ve been asked a couple of times recently about the pros and cons of gifting your RRIF to your children while you’re still alive. While many people’s gut reaction might be a quick no to this idea due to tax consequences, there are times where it might make sense to do so.

First, you need to be very careful about giving away too much money too early, as you may live for a lot longer than you think and you need to make sure that your hard-earned retirement savings are there to support you. But let’s assume that you’re a widow and have more than enough guaranteed pension money coming in for life, and that you also have, say, $250,000 in a RRIF account that you really don’t ever expect to need or use. You also have two children who are both raising families and although they have good jobs, they are struggling to come up with enough money for a down payment on a house.

The tax system in Canada is progressive, which means that the tax rate you pay increases as income goes up. If you pull the full RRIF amount out in one year, and then include the pension and other taxable income you already have coming in, you will end up paying the top marginal tax rate on a sizable chunk of that money.

Assuming that you have $60,000 of other taxable income in a given year, you would pay roughly $13,647 in taxes. But the next dollar earned would be taxed at 28.2 per cent and this would climb to a 47.7 per cent tax rate on income over $203,000.

So, if you were to sell your entire RRIF assets and add your $60,000 of annual pension income, you would end up paying a total of $120,773 in tax!

In essence, you’d pay $107,126 in taxes on the $250,000 of RRIF money and have $142,874 left to gift to your kids. Sounds like it makes no sense, right? Here’s the catch. When you pass away, the RRIF account’s entire value will be added to your final tax return, so you will likely end up paying this much tax anyways and will leave a similar amount of after tax money for your kids.

You might consider spreading this taxable income out over a number of years. For example, if you were to draw $50,000 out per year for 5 years, you would pay $30,056 of tax per year which is $16,409 per year of extra taxes over your regular amount (I’m excluding other factors for simplicity here). Five years of this extra tax would amount to $82,045, which would represent an extra $25,081 of money that you can gift to your kids instead of the government.

It is very important to understand that each person’s situation is unique and the idea of selling the RRIF assets over 5 years works for this hypothetical situation may or may not work as well for you. If you’re considering gifting some assets to your kids now, sit down with a certified financial planner professional first to look at all of the variables and craft a plan that works best for you.

Brett Millard is the owner of SPEIR Wealth Management in Kelowna. Reach him by email at brett@speirwealth.com.