Gifting money to children in Canada is a common practice. But it’s important to consider the long-term implications before committing to a large amount.
Whether you’re gifting cash or property to your children, it’s vital to understand the tax consequences. Especially with the recent anti-income sprinkling rules, it’s important to structure gifts properly to minimize tax liabilities.
No Tax Implications
Giving money to children is a common way for retirees to provide financial support for family members. It can also help to reduce estate tax, probate fees and spousal claims on assets when the giver passes away.
However, while gifting money to your children is generally tax-free in Canada, there are some important nuances you should understand before making an outright gift to someone else. The tax implications for gifts of cash, stocks, real estate and other forms of capital property vary depending on how you structure the transfer.
Unlike gifts of cash, giving real estate or appreciated stocks will have tax implications since these assets are treated as dispositions for Canadian income tax purposes. If you gift a property that has increased in value over time, the recipient will take on the tax basis of the original cost and will have to pay capital gains tax on the appreciation when they sell it later.
Another potential issue with gifts of capital property is attribution rules. If you gift an investment account to a spouse or a related minor child, the recipient will attribute interest or dividend income earned on the funds back to you.
As a result, this could have a dramatic impact on the couple’s overall tax position.
One way to make sure the gift doesn’t have tax consequences is to gift the funds to a grandchild who is under the age of 18 and has a Registered Education Savings Plan (RESP), Tax-Free Savings Account (TFSA) or an RRSP. These accounts allow funds to be gifted to a grandchild tax-free and without attribution.
If you want to gift a grandchild cash, but don’t want to use TFSAs or RRSPs, there are other ways. You can also use a non-registered account to gift funds, such as a RRIF or a GIC.
You can also give a small amount of money to a child as a down payment on a house, although this can be difficult to do if the property is in a higher tax bracket. You can also protect the gift from spousal or creditor claims by setting up a trust to hold the money until the recipient dies.
No Restrictions on Cash Gifts
Gifts of money to children in Canada are tax-free and are a great way to help them build their financial future. However, there are some restrictions that you should be aware of when gifting money to your kids.
First of all, gifts should be made voluntarily without consideration or contract. The Canada Revenue Agency and Black’s Law Dictionary define a gift as a voluntary transfer of personal property without a promise of payment or an obligation to return the property.
If you give money to a child in Canada, it’s not taxable as long as there are no goods or services exchanged. That’s why it’s important to be careful about the money you are giving your children.
As a parent, you may want to consider gifting your child a lump sum of cash for their wedding or down payment on a house. Generally speaking, though, cash is not a problem for the gift recipient because it’s generally considered an unrealized disposition.
It’s also not a big deal for you because capital gains from the property are not attributed back to you as the gifter. You’ll be paying tax at your highest marginal rate on any income earned from that money, but your children will pay a lower marginal rate since they are in a different tax bracket.
Nevertheless, you should still be aware that the Canadian income tax act has attribution rules that apply when a parent gifts money to their child. This rule is designed to protect CRA from taxpayers abusing income splitting strategies and from reversals of tax.
To avoid that, make sure the money you give your child is not an asset they could sell and use to income split and save taxes for many years to come. In addition, you should ensure that the money you are giving them is in a tax-free savings account (TFSA) or other tax-deferred investment.
Another option is to put the cash into a special account that will be used by your child as a down payment or for the purchase of a house. This can be accomplished by creating a deed of gift, says Nicole Ewing, Business Succession Advisor and Tax and Estate Planner at TD Wealth. It’s a good idea to consult with legal and financial professionals before you create this document so that you can make the right decisions for your family.
No Implications for Down Payments
If you’re looking for a way to help your children save for a down payment on their first home, consider gifting them money. In Canada, there are no tax implications and the amount you can gift is up to you. In fact, many Canadians are gifting down payments to their kids in an effort to help them own a house sooner.
Down payments are an essential part of any mortgage, and they’re a great way to save on interest charges and reduce CMHC insurance premiums. However, there are some important nuances to gifting your child’s down payment.
Generally, most lenders will require that the down payment funds be gifted by an immediate family member like a parent, grandparent or sibling. This ensures that the gift is truly a gift and not a loan. Typically, a gift letter will also be required to confirm this. This can help your child prove that they are not obligated to pay back the gift. You’ll want to speak with a professional before giving out any money for a down payment. They’ll be able to answer any questions you may have. They’ll also give you valuable advice on the best ways to help your child save for a down payment.
No Implications for Loans
Gifting money to your kids can be a fun and rewarding way to help them achieve their dreams. Whether it be a down payment on their own home or some untaxed cash to pay off debt, gifts can be an excellent way to help your children move forward in life. However, there are some important considerations before you go out and make your big move. Fortunately, Canada is home to a wide array of tax-free opportunities that are available to help your kids grow and thrive.
For example, there are no taxes on cash donations and down payments, and the government has a number of programs that can help you get started with gifting. In addition to these perks, there are also a variety of ways to save on taxes that will be a benefit for both you and your loved ones.
The best way to avoid any potential tax pitfalls is to consult with a professional tax advisor.
Among many other things, David A. Grantham is a contributing author to UmassExtension West Vancouver Blo. He is a renowned expert on real estate in BC.
Born in North Vancouver, Louisiana, Dr. Grantham grew up in Lower Lonsdale. He then went on to complete his business degree at the University British Columbia. As of this writing, Grantham has completed over 100 projects, including the development of a high rise building in Vancouver.
He is a husband, father, son, brother, and friend. He was a dedicated outdoorsman and enjoyed sports such as hunting, fishing, scuba diving, and snow skiing. His wife, Alison Grantham, and their two daughters survived him. He is survived by his wife Alison Martin Grantham and two daughters.