As a parent, one of your hopes in life is to watch your children grow up and be happy, stable, and free of worry. Many parents like yourself want to see their children succeed and enjoy the important milestones in life such as their wedding, buying their first home, or starting a family of their own. For many people, achieving those milestones can be challenging. Instead of leaving cash or assets to your kids in a Will, providing them with lifetime gifts may allow you to watch them achieve those goals while you are still alive.
Frequently Asked Questions
I'm gifting cash or property, what do I need to know?
Cash - As a Canadian taxpayer, you don’t have to worry about lifetime gift taxes when it comes to money. Generally speaking, this means that you can gift any amount of cash to a person resident in Canada without worrying about tax issues. There are no adverse tax consequences to you from gifting cash to anyone, other than:
- your spouse (unless it is for his/her TFSA), or
- a minor (under age 18) and who is either:
You may lend money to a spouse or a minor (or indirectly through a trust) without negative tax consequences to you (any income and capital gains will not be attributed), provided a minimum rate of interest is charged on the loan, and the annual interest on this loan is paid to you no later than 30 days after the end of the calendar year. This is called prescribed rate loan (PRL) planning.
- When setting up a PRL for your spouse, a minor or a trust for them, the borrower must pay interest at the Prescribed Rate set by the Canada Revenue Agency. PRL planning is a method by which a spouse, minor, or Trust can invest the money you loaned and not have income or capital gains attributed back to you. After paying interest on the loan, they benefit from the income and growth on the invested loan amount and pay tax on any income and capital gains at their marginal tax rates.
Principal Residence – Maybe you’re looking to downsize? Suppose your property is designated as your principal residence for each year that you owned it. In that case, any gain arising from either selling or gifting your home may not be subject to tax because of the principal residence exemption.
What if I want to gift assets other than cash or my principal residence?
You may be thinking, “Am I able to gift my children assets other than cash or my home?” The answer is yes, you can, but it requires additional planning.
Canada’s Income Tax Act has a rule that states any investment or capital property that is gifted is deemed to be disposed of by you at the property’s fair market value. To put it simply, it is treated as if you purchased a piece of property, and if its value has gone up, then you must pay tax on the capital gain.
What if I want to live in the house after I gift it?
So you’ve gifted your home, but you still intend to live in it. When gifting any capital asset, you, the gift giver, are not able to take back the asset or should not receive benefits after the transfer. In this case, you may want to consider gifting your home but also retain a life interest in the house, so that you can continue to live in your home.
What is a gift of a lifetime?
An exception to these gifting constraints is often referred to as a “gift of a lifetime.” A gift of a lifetime is when you, the parent or grandparent, purchase a cash value life insurance policy and/or critical illness insurance policy (which may include a refund of premium option), on a minor child. In this instance, these policies can be transferred to a child after age 18 without triggering any gain on the transfer and without attribution of any future income to you.
My child is a US resident. Am I able to gift them cash or assets?
If your child is a US resident and you are interested in gifting them cash or assets, it is important to know that there are certain annual gift reporting (the gift it is not income) requirements by him/her in the US.
On the other hand, if you as the donor (making gifts) are either a US citizen or resident, you (not the recipient) may have gift tax consequences when making gifts to any person, regardless of where the recipient is resident. There are both annual and lifetime gift tax exemption amounts available for US citizens and residents.
As a US citizen or resident, your annual gift tax exemption amount is a per donee (recipient) amount of $15,000 USD in 2021 (and $159,000 USD in 2021 for gifts to a spouse who is not a US citizen/resident). To qualify for this annual gift tax exemption, your gift to the donee must be a gift of a “present interest.” This means that your donee must have the immediate right to use and enjoy the gift or amount they received.
In 2021, if you as a US citizen/resident have never used any of your lifetime unified (gift/estate) tax exemption amount for gifts, you can shelter up to $11,700,000 USD in gifts from gift tax. Note, however, that this lifetime exemption amount is available to offset both gift and estate taxes. If you use any lifetime exemption amount to cancel any gift tax while you are alive, there would be less unified tax exemption amount remaining to offset any estate tax upon your death.
Regardless of what you are gifting and to whom, you should always ensure that your own financial security is cared for before you make gifts. This means ensuring you have enough money to live comfortably and take care of your wellbeing in case of any unexpected emergencies or medical expenses. Once you are confident in your financial security, you should work with trusted financial and tax advisors to also avoid any unexpected tax consequences.
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