While there are a number of reasons for a parent to consider passing on a living inheritance to adult children, one that may be overlooked is tax savings.
Cash and assets that parents have no intention of spending while they're alive — what tax and estate planning expert Jamie Golombek calls "never money" — may wind up costing more than necessary in fees and taxes.
"If mom and dad have never money, all they're doing is growing a pile of wealth and paying tax every year on that income, perhaps at a very high tax rate," says Golombek, who is a member of the CIBC Wealth Strategies Group.
"Whereas that money could be used by the kids and perhaps invested at a lower tax rate or used to pay down debt."
What many people don't realize, Golombek adds, is that Canada has no gift tax.
As a result, cash given to children, grandchildren or any other individual while you're alive won't be taxed.
"If you want to give them $1 million tomorrow, it's not reportable anywhere. It doesn't show up on their returns. It's not income," says Golombek.
However, the giver could be liable for tax on capital gains if the gift is property that has appreciated in value — as might be the case with a family cottage or a portfolio of stocks.
But that isn't to say there aren't any tax advantages to gifting appreciable assets to your children while you're alive.
For example, a parent in a high tax bracket that gifts funds from a large non-registered portfolio generating taxable investment income to a child could potentially avoid future clawbacks of Old Age Security, says Jason Heath, a fee-only financial planner with Objective Financial Partners in Toronto.
"If you're a senior who's getting OAS clawed back, you're paying a minimum of 43 per cent tax and you could easily be paying up to 62 per cent tax depending on your province of residence," Heath says.
"So there's a good chance there are some tax-saving opportunities by taking non-registered assets out of your hands and giving it to a child to pay down their mortgage or to make an RRSP contribution."
Golombek says another benefit of giving your heirs an early inheritance is that it could help them avoid or reduce probate fees — an estate administration tax that varies by province but is based on the value of the estate.
"For example, in Ontario 1.5 per cent is the estate administration tax," says Golombek. "But if you don't own the asset when you die, you don't pay the tax. So transferring wealth before you die would minimize (the tax)."
Because the tax rules around gifting assets are complicated, Heath says it's important to solicit advice from the right professional.
"I've come across people who took advice from a teller at the bank, or an investment adviser or an accountant without strong tax and estate planning expertise, or a generalist lawyer whose not a tax and estate lawyer, who have given outright incorrect advice," he says.
"People need to be sure that when they're looking for tax or estate planning advice on a complex issue that they're speaking to someone who understands that issue."