A loan or a gift of money to a family member can truly provide a helping hand. But caution is required if you want to avoid unpleasant surprises or misunderstandings. Here are a few valuable tips to simplify the transfer of money or assets to a loved one.
Many people would like to help their loved ones financially during their lifetime rather than wait until after they’ve passed. And wanting to help is a good thing, but you need the means to do so. This is where a retirement-income projection can serve to evaluate your financial independence. It provides calculations that take into account several factors, including life expectancy and cost-of-living increases. Because such considerations can be quite complex, don’t hesitate to seek help from your financial advisor.
Once you’ve made sure you’re able to give without jeopardizing your retirement, the next step is to decide between a gift and a loan. Each has specific legal and tax implications.
When it comes to gifts, the tax implications vary according to whether you are giving money, financial products or a cottage, etc. To avoid unpleasant surprises, get all the information you need before proceeding. Here are some examples of different gifts and their impact on your tax return.
There is no tax to pay on a gift of money to a family member, neither for the donor nor the recipient.
If you transfer an investment or a revenue-generating asset to a spouse or a child who is a minor, the attribution rules may apply. This means that you will be taxed on any income earned.
Want to make a withdrawal from your Registered Retirement Savings Plan (RRSP)? Keep in mind that all such withdrawals are taxable.
Have you decided to sell non-registered investments in order to make a cash gift to a family member? If so, you are required to pay capital-gains tax. The capital gain is the difference between the purchase price and the sale price of the financial product.
If you choose to give the family cottage to a child, remember that the capital gain is taxable. In the case of a cottage, it often makes more sense to sell it at its current market value. Otherwise, when it’s resold, tax on the capital gain will be calculated based on the purchase price paid by the parent, unless the cottage becomes the child’s principal residence.
In the case of a farm that you want to give to your children, the situation is a little different. Capital-gains tax must be paid, but specific rules allow for deferred payment.
In all cases, a tax specialist can help you to fully understand and navigate the tax laws. Along with you, he or she can map out a strategy that best responds to your situation.
After a person’s death, it’s not uncommon to see disputes arise among the heirs. And gifts that have been made can often cause tension among family members, especially in the absence of documents outlining the parent’s intentions. It’s easy to imagine the confusion that ensues when documents are either unclear or are open to different interpretations. That’s why when it comes to planning your estate, it’s extremely important to protect your beneficiaries by formalizing the gift with help from a legal professional.
In Quebec, this involves publishing a notarized act in the Register of Personal Rights, where, for example, you could insert an exemption-from-seizure clause that would protect an asset from falling into the hands of potential creditors.
The notarized act also offers increased protection in the case of separation or divorce. It establishes the source of the asset, the date of transfer and its exclusion from the conjugal assets. Since this applies to capital as well as income, it will not be part of the division of the family patrimony or matrimonial regime.
If you live in Ontario, the best way to formalize a significant gift is in your Will. This can be achieved in one of three ways: First, you can outright forgive the gift, meaning it disappears without affecting your estate. Second, you can demand repayment; for instance, in cases where the funds are needed to provide inheritance to other beneficiaries. And finally, in order to be fair to those who may not have received a gift, you can require the amount to be deducted from the beneficiary’s share of your estate. In this case, the gift would be deemed an advance on the beneficiary’s future inheritance, and therefore forgiven.
A well-advised Will, or a notarized act in Quebec, will clearly formalize your intention when it comes to gift-giving. By carefully planning your legacy now, you can rest assured life will be easier for your heirs when you’re no longer around.
Instead of an outright gift, perhaps you want to make a loan in order to eventually get your money back? In this case, to ensure repayment of the loan it’s advisable to include guarantees in the event of insolvency. You can consult a notary to have the necessary contract drawn up. Also remember to provide statements to help track the repayment of the loan. In the event of death, this can help prevent misunderstandings among the heirs. Don’t forget that you must also report any interest you may have earned in your tax return.
If you wish, you can also waive any interest payments or repayment of the capital. And you can do so without incurring tax implications.
There are special rules, though, for certain types of loans.
Also known as a demand loan, this type of loan offers great flexibility for repayment. Another notable feature is that such loans are subject to prescription three years after the date of signing, meaning that the right to demand repayment expires if no payment has been made during this period. To ensure that the demand-note loan remains valid, make sure to have it renewed in a timely fashion by signing a new note or an acknowledgement of debt. You can also demand a payment. This can help to avoid many difficulties in the event of the death of a creditor who has not been fully repaid.
An interest-free mortgage is often used as a way to help a child become a homeowner. It has the advantage of offering security to the lender, because the house is under guarantee and there are no tax implications.
You can sometimes use a loan to a minor child or a spouse to reduce your income tax. As with gifts, the attribution rules may apply to loans used for investments. This means that you can be taxed on the income generated. To avoid this scenario, it’s recommended to stipulate an interest rate equal to the one prescribed by the Canada Revenue Agency.
This can also apply to a loan made to an adult child, depending on the intent of the loan. The attribution rules do not apply for a loan for the purchase of a car, but if the goal is to reduce your income tax, you must comply with the rules. Need help to make sense of all this? Simply talk to a financial planner.
Are you a parent and entrepreneur who wants to make sure your business is successfully handed down? If so, you need to avoid confusing the notion of “estate freeze” with gift-giving. Estate freeze is designed to freeze the value of an enterprise on a precise date. The surplus value is then transferred to the next generation.
But be aware that this does not constitute a gift. It’s more of a financing method offered to the child who is taking over the business. To make sure everything goes as planned, make sure to review the shareholders’ agreement with your notary.
Loaning or giving money to a family member comes with its share of complexities, and the tax consequences can be significant. Take the time to discuss these matters with your financial planner. By doing so, your spirit of generosity won’t turn into a headache the next time you file your tax return.
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