Give a Little Bit: Tax Planning & Gifting

Length 4:53

Jamie Golombek
Managing Director, Tax & Estate Planning, CIBC Wealth Strategies

“Families often have what we call ‘never money.’ Never Money is money that you're never going to spend in your lifetime. And if you have never money, one thing that you might consider is giving some of that money to kids, grandkids, nieces, nephews, while you’re alive in the form of a gift. Now there are a lot of misconceptions about gifting. The good news is that in Canada we don't have any type of gift tax at all. So you can give as much money as you want, to whomever you want and there's absolutely no tax. They don't report it on their return. You don't have to declare it. It's a completely tax-free gift. Not so in the United States. In the U.S. they have a gift tax which limits gifts to a certain amount per year, depending on if it's a spouse or other individual. So no limitations on gifts in Canada. Gifts are always received tax free. Then it depends on the type of gift you are giving. So the easiest thing to give is cash, you give cash away - no problem, it's not declared anywhere, it doesn't go on your return. If you are however giving property and that property has gone up in value, that's considered to be a deemed disposition. So for example, if you've got mutual funds and you've got securities, and you are gifting them to your son or daughter, there would be a disposition of fair market value and that would give rise to capital gains tax right away on the difference between what you paid and the fair market value on the date that you make the gift. Similarly if you're giving your vacation property like a cottage or a summer home to the kids, that would be a disposition of fair market value. You may be able to use your principal residence exemption to shelter that gain. But if that's not available because perhaps you have another home that you're hoping to save it for, then you would have to pay capital gains tax on the increase in value. Again this is not a gift tax, this is just a tax on the increase in value on the period of holding.”

Gifting to mimimize taxes for the entire family

“When we look at family planning, in terms of tax planning for the entire family, what we're trying to do is really minimize the amount of tax everybody has. So if mom or dad is in a high tax bracket and they've got this never money and it’s invested in a non-registered account, and they're paying tax at over 50 percent on, you know, interest income, ordinary income - 7 out of 10 provinces in Canada have a tax rate of over 50 percent. In Ontario it's 53 and a half percent if you're in the top rate. Gifting some of that property in advance to the kids, and then the kids investing it in their name if the kids are in lower tax brackets than you, then there's no concern whatsoever on income splitting as long as the kids are over the age of 18. So it's an opportunity to save taxes during your life. Plus if you don't own the property on death you won't be subject to the deemed disposition on that fair market value and therefore the kids can continue owning that even beyond death.”

Probate tax

“Another thing to consider, most provinces in Canada have a probate tax, up to one and a half percent of the value of the estate. If you don't own it when you die, it's not subject to probate. So the opportunity of giving some of that property away to the kids might save some probate tax as well.”

Help kids pay off debt

“Finally I would say, that if the kids have debt, whether it's credit card debt, a line of credit or even a mortgage this seems to be the best use of family money. If you've got this never money that you're never going to spend. And the kids meanwhile are paying interest - even with low interest rates - they're paying interest on nondeductible debt such as personal mortgages, credit cards and things like that. What better use of the money in the family, to be able to transfer that money to the kids and help them pay down some of that debt? And then finally when it comes to real estate some family members are concerned that if they make a gift to the kid and maybe it's a down payment on a home. What if that kid then gets divorced or separated and there's a marital breakdown, how can that money be protected in the family? The simple solution to that, is simply instead of making an outright gift to a child for real estate, is take back a secured zero percent interest mortgage on that home. So if you want to help the kid buy the home loan them the money take back a secured mortgage. That way if there's ever a breakdown in the relationship you could always call that particular loan and be able to repay. That's a way of protecting your effective gift which you could then forgive later on when you're comfortable with the situation. So for all kinds of more information about gifting and some of the tax implications please see our latest report on gifting.”