A few weeks ago, I did a talk for Nature London, as part of their Nature in the City series. While I do a lot of talks on financial, charitable and estate topics, this one was a bit different, as it was on my passion for astronomy, and astrophotography in particular. This was my third time in a decade talking about space for this speaker series. There were a few familiar faces in the audience, including several people who had come hear me talk on my usual estate and financial topics – if you were there, it was lovely to see you! My love of space started at the tender age of six, when my Uncle John gave me one of the most memorable gifts of my life – a subscription to OWL magazine. With the subscription came a back issue from 1978 – a feature on the Space Shuttle. The centerfold, which I remember to this day, was a detailed image of all of the components of the shuttle. It was, as they say, a gift of a lifetime. I was even more delighted, four decades and a bit later, to have the publisher of OWL magazine dig up the front cover so I could use it for my presentation. In the days since I spoke of my own experience receiving an impactful gift, the topic of gifting to loved ones has come up repeatedly in my professional practice. Gifts to family, ultimately, can be life changing…but not always in a good way!
Giving to your family… the right way
One would think that it is a fairly simple process to gift a loved one funds, but its not always as straight forward as it seems. In Canada, giving money to adult family, other than your spouse, is largely a tax-free event for all parties, although, if the gift-granting person is liquidating non-registered investments, they may trigger capital gains when selling those investments. There are a number of tricky situations you have to keep in mind while giving, however.
- Giving to your Spouse. If you gift funds to your spouse, and they turn around an invest them in a non-registered investment account, then the income may be attributed back to you – especially if your taxable income is higher than theirs. CRAs position is that the purpose of your gift in this case is to lower your taxable income, but shifting assets to the lower-income earning spouse. In this case, the best method to gift funds is for you to give your spouse a spousal loan. In return, you spouse pays you interest, which becomes taxable to you. It is also a deduction to them. As long as your spouse pays you interest at the proscribed rate published by CRA, you are onside for tax purposes. The proscribed rate is set each quarter, and applies for the lifetime of the loan. This can be both good or bad – allowing you to lock in at a low interest rate, as the rate bottomed out at 1% a couple of years ago, but currently sits at 4%. Most of us would agree that if you had been able to lock in for life the 1% rate, it would make a lot of sense to keep that spousal loan in place as long as possible. The current 4% rate, however, makes doing this kind of arrangement much less attractive – especially since the interest is payable (and hence taxable to the giving spouse), even if markets have negative returns. Most people might be better to wait for lower interest rates to look at this scenario.
- If you or your family member a US Citizen (or dual Citizen). While Canada does not generally tax gifts to non-spouse family members, the USA does. This is a problem for US Citizens, as the USA taxes on citizenship, not residence. As of 2024, there is a $18,000 yearly exemption, as well as some lifetime exemptions. The rules are complex – as I am not a US practitioner, I always encourage folks to contact a qualified cross-border accountant before making a gift, to determine any consequences.
- Unstable family situations. In Ontario, a gift from a parent is generally treated the same as inheritance, and excluded from family property. However, if a parent gifts a child, and the child then mixes the funds into a joint account, or into the family home, this protection is usually lost. It is extremely important that the receiving person knows this rule, and ideally keeps it in a “clean” account separate from other holdings to be able to track the source of the gift separately from other assets. In my years of practice, the single biggest regret I see is folks who receive a gift or inheritance, and then co-mingle the funds with a spouse. When a separation happens, the spouse can walk away with 50% of the gift, especially if it was put into the family home from paying off a mortgage, or deposited to a joint bank or investment account. The same rules apply to inheritances, so make sure if you receive money you are 100% certain about your spouse and marriage before co-mingling assets! My dear friend Laura Camarra, a family lawyer, is going to join us on a webinar on March 4th to talk about family law, and the implications of gifts – so stay tuned if this is of interest!
- The kiddie tax, and tax on split Income. If funds are gifted to a minor child, CRAs position is that the funds are generally taxable in the hands of the giver, if the giver is a close relative. This applies to interest and dividends paid by the investment, but not capital gains. Usually in this scenario a parent sets up an information “in trust for account”. The situation is even more complicated if the gift is privately held shares. I could write an entire article just on the ins-and-outs of that arrangement – suffice to say, if you are thinking of gifting any private company shares to a child (be they a minor or adult), get qualified tax advice first!
Beyond even these situations, the single most important thing that you can do is document, document, document! Some of the worst and longest court cases involve estates, where one or more children of family members were gifted funds while the giver was still alive. Without documentation, or you being alive to testify, it can be challenging for a judge to determine if a gift was a gift. Many court cases have happened because another beneficiary claims the gift was a zero-interest loan, not a gift. Things can get expensive very quickly, if there’s no documentation available to support the gift.
Thinking about the impact of the gift
One crucial thing to contemplate, especially on larger gifts, is the impact that a gift might have your child or grandchild’s relationship status. Money has funny impacts on relationships – and a sudden infusion of cash may change the balance of power in the relationship, either for the better, or the worse. Here are just a few scenarios I have seen play out in my career:
- A gift triggered the ending of a relationship in which the child was staying in a relationship due to financial constraints. This was a very positive situation for the child who received the gift who felt trapped.
- A spouse insisted that they quit work when they were gifted a large sum of money. The spouse worked 70+ hour weeks. The gift was large enough to ensure they didn’t need to continue working. The parents were quite upset in this situation, as they valued the work their child was doing, and felt that they had inadvertently caused their child to quit work at a young age.
- A large gift funded an unsustainable, lavish lifestyle. In this case, the inheritor had lived hand-to-mouth for most of their lives with significant consumer debt. They did not have the financial acumen to manage money, and spent the gift almost immediately on frivolous items
Making your gift make a difference.
One growing trend I have seen in my planning practice is a move to gift an experience, rather than cash. My uncle’s gift of OWL magazine sparked my lifelong interest in astronomy – a gift that has kept on giving for many decades. I’ve seen gifts of trips to places that loved ones might never be able to bring themselves to do without an external intervention. One of my favorite gifts of all time as a parent who choose to give their children money to donate to charity. The gift to the children was unrestricted, but the parent hoped the children would give it away. This allowed the kids to claim a significant amount of tax relief, putting money in their pocket, as their were in their peak earning years. The parent paid little to no tax, but had significant assets. The kids were able to use the resulting tax relief to pay down their mortgages. It was a win-win-win scenario, with several charities receiving substantial donations that otherwise might not have happened. At the end of the day, every gift will be unique to the parties involved. Spending time to think about the gift you want to make to your loved one, and its potential impact will go along way to make sure it is a positive experience for all involved.
Ryan