Gifting Money to Adult Children

What are the tax implications of gifting cash to adult children while you are still alive? This is a common question from those undergoing tax and estate planning. There is a misconception that there is a tax on such a transfer. This is most likely a result of specific gift tax rules in the U.S.

RESTRICTIONS

Unlike the U.S., Canada does not have any gift tax rules. Therefore, there are no restrictions on the amount of cash that can be gifted to adult children and there are no tax implications to either party.

Please be aware that the Canadian Income Tax Act has specific attribution rules when one gives money to minor children. Essentially any income earned on the capital gifted to minor children will be taxes in the hand of the parent(s). There is an exception for capital gains.

ADVANTAGES OF GIFTING MONEY TO ADULT CHILDREN WHILE YOU ARE STILL ALIVE

In many situations you are holding excess cash and paying tax at the highest marginal tax rate on income earned on these excess funds. On the other hand, your children are in a lower tax bracket. Therefore, they will pay tax at a lower marginal rate on income earned by the gifted money.

Another advantage of gifting money to adult children is to allow them to reduce or eliminate a mortgage or other debt. Reducing this ongoing interest expense is a great way to obtain a guaranteed rate of return.

GIFTING MONEY AND PROBATE FEES

Many provinces levy a probate fee (tax) based on the value of your estate at the time of your death. Therefore, gifting money while you are still alive will reduce the value of your estate and thus the ultimate probate fee.

The probate fee in Ontario is 0.5% on the first $50,000 and 1.5% on amounts greater than $50,000. While this fee/tax should be considered in all estate planning, one must remember that it is a small percentage of your entire estate. Too often people arrange their assets with the primary intent to avoid probate. However, the major issue with this approach is that you may be gifting money now which you may require at a future date. Please ensure that you do not need the money before considering a gift.

OTHER CONSIDERATIONS:

• Legal documentation of significant gifts especially if all siblings not treated equally;
• Alternately, written documentation that it was always your intention to make a gift.