Lifetime options to complement your estate planning
Odd that it may sound, estate planning can sometimes be too focused on … well, the estate.
As it’s the first word in the phrase, it understandably tends to influence thinking toward transferring assets at the point of death. Taking a broader view, estate planning is about sharing one’s time and wealth in whatever way best suits values and circumstances.
Many of us will hold on to the bulk of our property to take care of ourselves throughout life, with the timing of that final passage being fairly uncertain. But for those who determine that they have more than sufficient for their expected needs, lifetime gifting is an appealing way to complement traditional estate transfers, whether by Will or other means.
Giving while living
From a purely emotional perspective, giving while living lets you observe and mutually enjoy cherished possessions with those closest to you. You’ll never see your children’s delight if they only receive things after you’re gone.
Of course there’s nothing sentimental if you’re simply giving money, but as a current gift it may be more practically aligned with your desires and their needs if it paves the way toward a brighter future for them. Particularly as we are all living longer, you may live beyond their money-intensive years — clearing student debt, buying a house, raising children — such that even a modest gift today may be more valuable than a large inheritance many years out.
Even so, don’t make yourself a pauper just to boost the next generation. Do the cash flow planning first, then determine what, when, how and how much you are ready to part with. The remainder of this article looks at some key tax and financial issues to help inform your gifting intentions with your adult children.
Spectre of taxes generally
As often as not, tax is the driving force for those contemplating gifting. With an unplanned estate, the risk is that family wealth may be eroded by taxes that otherwise might have been avoided or minimized if action had been taken earlier. Nonetheless, one must be cautious that the pursuit of current tax savings may come in exchange for equal or greater future taxes or other costs, so be conscious of that potential quid pro quo.
And even if you’ve worked that tax trade-off into your planning, it’s possible that any children not included in the current gifting may perceive it as favouritism. With that in mind, be prepared to respond and explain how it works for everyone’s benefit, or maybe initiate that communication yourself, as suits your personal style and family dynamic.
Giver – Tax on disposition
A gift may take many forms, with no tax arising if it is cash, personal effects or common household items. However, tax will apply when there has been an increase in value of real estate and marketable securities (individually held, or in a pooled form like a mutual fund), and things like art, jewelry, collectibles, designer clothing or antique furniture.
Whatever form a gift takes, when you sell or give away property, you are taxed if there is a capital gain. That’s calculated as fair market value (FMV) less what you paid for it, being your adjusted cost base (ACB). Under current rules, half of the capital gain is added to your income for that year, known as the taxable capital gain.
When you sell to someone at arm’s length, the price will usually serve as FMV for tax purposes. By contrast, there is no sale when it’s a gift, and you are definitely not at arm’s length (in tax terms) when you give to family members. For marketable securities, there is a ready market that can be consulted to determine FMV, but it can be trickier where distinctive items or real estate are involved, so the services of a professional valuator may be required.
As we pay higher tax on higher income levels, it may be more tax-effective to make a series of smaller gifts over a few years, rather than the full gift in one year. This is easy enough to do with countable property like securities, but may require more complex planning and professional guidance for large indivisible things like real estate.
Income preservation, via intergenerational income splitting
Some public support programs hinge on one’s own income. Both guaranteed income supplement (GIS) and old age security (OAS) have income thresholds beyond which payments are subject to a recovery tax, or clawback. If you give away property that earns investment income, you may be able to preserve more of that government money.
To be certain, you truly are giving up your legal rights to that gifted property, and to the income it generates. In fact, if the child was legally obligated to pay it to you, that would likely be treated as a trust and not a gift, and you would have to report that income yourself. With full awareness and transparency of that point, investments that are properly gifted to a lower tax bracket child (who presumably would eventually receive those assets through your estate anyway) can both preserve public income for you, and facilitate more net-of-tax investment income for them.
Terminal tax mitigation
A further benefit to an early transfer of investment property is that capital gains thereafter will accrue to the benefit of the new owner. Bear in mind that tax on capital gains is not imposed until there is a disposition, which includes both an actual sale and a deemed sale on an event such as a person’s death. If you’ve already given away that investment property, then your death (as unfortunate as it is for you personally) is not a taxable event for that child. Not only does this defer tax until your child decides to sell, it also likely results in absolute tax savings given that final year income generally pushes up through high and top brackets when deemed dispositions are included.
No gift limits or gift tax
To put it simply, there is no restriction on how much you can give to anyone, whether during lifetime or at death. That said, apart from the property itself, you personally may be constrained and liable to replenish property in some situations, for example if claimed in a matrimonial dispute or if you give things away to thwart creditors. Otherwise, if you have full rights to the property, you can dispose however much and to whomever you please.
No receipt or inheritance tax
The recipient is not responsible for any tax on the gift. This is true whether given during life or at death. Be aware though that if others have claims on the property ahead of your own rights, you cannot merely give away the property to someone of your choice and thereby extinguish those claims. The recipient cannot obtain any greater rights than you yourself have, and in extreme cases the gift may be undone to satisfy a prior claimant.
Probate tax
A nagging concern for some people is exposure to probate. This is a tax that some provinces levy on property passing through a formal estate, with the highest rates being about 1.5%. That pales if an avoidance action leads to higher income taxes, which can near or exceed 50%. Still, probate avoidance is a valid objective, keeping in mind this proportionality, and how it fits with other planning priorities. For more, see our article Probate.
US estate tax
Canadians may be subject to US estate tax if their worldwide assets at death exceed the threshold (US$15M in 2026, annually indexed thereafter). Though this captures a relatively small population segment, a US estate return must be filed if US assets exceed US$60,000, even if no tax is due. For those affected, a gift or sale of that property could simplify estate administration. For more, see our article US estate tax & estate returns – For Canadians.
Being prudently proactive
Informed by these tax issues and interpersonal considerations, gifting can be an effective way to achieve your estate planning goals, with you being a living witness to how it contributes to the lives of those most important to you.