A reader asked: Is there a maximum amount of cash that can be given to your adult children while you are still alive without tax implications for either party? Because this is a question that can be explored from a few different angles, I invited Jamie Golombek, managing director, tax and estate planning, with CIBC Wealth Advisory Services, to answer it. I also asked him to elaborate on the advantages and disadvantages of gifting money to adult children.
The following Q&A has been edited and condensed.
So are there any limits on gifting money to adult children?
There are no restrictions whatsoever on the amount of cash you can give your adult kids while you're alive. And there are no tax implications because we don't have a gift tax in Canada, unlike the U.S. Therefore, I think it's one of the biggest misconceptions that somehow there would be some tax to pay.
That being said, if you give money to your kids who are minors, any income or dividends [earned on the capital] are attributed back to you [and taxed in your hands]. Capital gains, however, do not attribute. That's an exception to the general rule.
Once the children are over the age of 18, you can make a gift to them and they can earn any income they want [and pay tax at their rate] and there's no attribution at that point.
What are the advantages of gifting money to children while you are alive as opposed to leaving it to them in your will?
There are a couple of advantages. The obvious one is that you get to see the kids enjoy the money while you're alive as opposed to never knowing what they're going to do with it when you die. Second of all, often young adult children have debt. One of the biggest advantages for them is being able to reduce a mortgage or other debt and save interest every year. If you're already debt free yourself, giving money to an adult child to pay down debt can be a great way to get a guaranteed effective rate of return, which is the interest rate on the mortgage.
Most important, however, if you've got excess funds and you're in a higher tax bracket than your kids, which is the case in many situations that I've seen, then, ultimately, if you're not going to use the money anyway, you're just paying tax at high rates. Why not give them a portion of the money that you're not going to need, let them invest the money and at least pay tax at a lower rate if they're in a lower tax bracket?
Is gifting also a good way to avoid estate probate fees?
In provinces that levy probate – most particularly I would say Ontario, B.C., and Nova Scotia, which have the highest rates of probate – by giving money away in advance it's not part of your estate, and you would therefore certainly save the amount of probate on the funds. [In Ontario, for example, the probate fee is 0.5 per cent for amounts up to $50,000, and 1.5 per cent for amounts more than $50,000.]
So is avoiding probate a good reason to consider a gift then?
You have to be very careful. Probate is a very small fee compared to all the other issues you need to consider. And I think the biggest issue is that you have to make sure that you don't need the money.
That's my biggest concern, that you're giving money away just to save 1.5 per cent at the end of the day. What if you need it back? That's the biggest problem with making a gift – it's very hard to get it back. We always encourage people to be sure that they don't need the money. If you don't need the money, I think there are very good reasons to give money away other than simply saving just the probate.
In some provinces, probate is not an issue. For example, in Alberta the maximum probate is $400.
Anything else people should know?
The only thing I would say is there have been a number of cases over the last decade or so which question some of these situations. You may just want to make sure that if you're making a gift you do some kind of legal documentation, because sometimes other siblings who don't get the money could get into an argument later on, maybe after you die, that maybe it wasn't really a gift. You just have to be careful that if you really want to make a significant gift, you might want to do a proper legal deed of gift or at least document it in writing that it was your intention to make a gift.