I have no problem deciding on Christmas gifts for my two boys. Buying for my daughter, Sarah, and my wife, Carolyn, is another story. When it comes to the boys, they now appreciate the same type of gifts I'd like for myself, including any cordless tool, my initials on a blacksmith BBQ branding iron, a quadcopter drone with an HD camera, a multifunction pocket tool, a plot of land in Slovenia or one acre of land on the moon (really, go to lunarland.com). I blew it last year when I bought Sarah the snuggle blanket with sleeves and I gave Carolyn the wrinkle cream, NHL team clock and three boxes of Hamburger Helper.
If you're wondering what to give your kids or grandkids this year, here are some age-appropriate ideas that will help them become financially literate and secure over time – definitely more practical than the colourful sweater you might be thinking about.
Ages 12 and under
Contribute to an RESP: It's never too early to start contributing to a registered education savings plan for a child. If you contribute $2,500 a year per child from birth to the age of 18, earn 6 per cent annually in the RESP and receive the Canada Education Savings Grants (CESGs) available from the government, you should have about $98,000 in the RESP for each child when they are ready for postsecondary school. That will go a long way to paying for that education.
Give them an allowance: It makes sense to start giving kids an allowance at about the age of 8. My suggestion is that the kids split that allowance into three parts: (1) savings for the future, (2) spending some today and (3) giving some away to help others. It takes discipline on the part of parents and grandparents to consistently give the allowance and follow up with guidance on how to manage the money. Set up a low-fee bank account so that kids can learn how to make deposits and withdrawals.
Ages 13 to 18
Once kids are in their teen years, keep up with the RESP contributions. The advantage of continuing the allowance until the age of 18 is that the kids will still be learning about proper money management, and the allowance will free up their earned income (if any) to invest (the kids will pay the tax on investment income earned with their own savings, unlike interest and dividend income on money you give to them, which is attributed back to you).
Create an in-trust account: Teach the kids about investing by setting aside a little money in an in-trust account and focus on capital growth. Capital gains will be taxed in the hands of the kids. Be aware that the money in the account does belong to the kids and they'll have a right at the age of 18 to do with the money as they wish. Once the kids are 18, you can move the investments to an account in their names alone.
Buy life insurance on their lives: It's possible to buy insurance on the life of a child and accumulate investments inside that policy over time. Once the child is over 18, you can transfer ownership of that policy to your child with no tax cost on the transfer. Effectively, you'll be transferring insurance coverage along with the accumulated investments in the policy to the next generation free of tax. I've done this with my kids. The insurance is inexpensive, because the kids are young, and when they receive the policies from me later in life, they'll have insurance protection and will be able to access the investments in the policy if they want.
Ages over 18
Once kids reach age of majority, consider giving them the in-trust account (see above) and continue with the investment in insurance. The allowance and the RESP contributions can stop. Also, consider the following ideas:
Make a gift of assets: Do a little estate planning by gifting to your kids some assets at an appropriate age. The less in your hands upon death, the less in taxes and probate fees you'll face. You'll be deemed to have sold those assets at fair market value when making the gift, so this could trigger tax on a capital gain, or could result in a capital loss that you'll be able to claim.
Help them with two key basics: There are two things your adult child needs to do: (1) contribute to a tax-free savings account (TFSA), and (2) file a tax return. Help your child by encouraging him or her to do both of these things each year.
Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.