A conversation that I have been having regularly with many of my clients in the last few years is that I am encouraging them to spend more of their money. True, this is a great problem to have but it is also a difficult shift for some people. Additionally, the reality is, some of these people will never spend all of their money: we call this "never money". The problem with "never money" is that if left alone it could trigger significant taxes at the time of your death and incur higher taxes during your lifetime as well.
Something that is somewhat unique in the Canadian tax code is that we don't have a gift tax. As a result, cash given to your children during your lifetime will not be taxed. Quite literally you could gift $1 million of cash to your child and there would be no tax recorded on the transaction. Your child does not have to claim the gift on their tax return in any way either. As a result, this gift money can be used to invest by your children, potentially at a lower tax rate or used to pay down costly debts given that they are at a younger stage in their lives.
Property works a little bit differently. If you were to gift a property such as a cottage to your child, the giver, would be responsible for any capital gains on the property to that point as the property would be deemed to have been disposed of at fair market value. Now this doesn't necessarily mean that gifting a capital asset is a bad idea, as with anything it depends on your individual situation.
For example, if you are in a position to collect old age security but your income is high enough that you incur clawbacks then it may be worthwhile taking the deemed disposition in order to reduce your future income. An additional benefit of giving an early inheritance is that you can avoid probate fees which are charged on assets held in your estate after you pass away. In Manitoba the probate fee is .7%. I would consider probate savings an added bonus. In many discussions with our estate and tax planners, we agree that the probate fee is too small to be a major consideration as sometimes the planning is more costly than the savings, especially if the goal is to avoid tax.
One way or the other, if you are in a position where you will have assets to leave behind to your children then there should be consideration given to gifting the assets early as you can see that there could be significant tax advantages. However, I would like to leave you with a word of caution as well. Before gifting any assets, including significant cash, then I recommend speaking to a qualified tax professional who has an understanding of your overall financial situation.
Over my years in wealth management I have met many people who have received inadequate or improper advice on matters like this. I have had many people come to me who have received incomplete advice from bank tellers, generalist investment advisors, or even generalist lawyers who did not have a complete understanding of the client's individual situation nor the tax consequences of their improper advice. The only way to make educated decisions in these areas is with comprehensive financial planning with a specialized approach. Only then can you make "Smart Money" decisions.
- Grant White, CIM, CFP
Grant White is a Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.
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