Planning to gift assets to your children? Ask the right questions.

Canada is currently in the middle of the greatest intergenerational wealth transfer in our history as an estimated $1 trillion changes hands from the Baby Boomers to other generations. 

If you have excess funds beyond your retirement needs, you may be considering passing on some of your wealth to your children and grandchildren during your lifetime. This strategy is called a living inheritance, and for many parents, sharing their wealth with children or grandchildren in life – whether it’s for a down payment, schooling or family support – is becoming increasingly common as the cost of living grows. 

If you’re considering gifting cash to your children or grandchildren, here are some questions we can address as we work with you to create a strategic giving plan. 

Can I afford to gift assets to my children or grandchildren? 

Whether or not you can afford to gift your assets depends on your personal circumstances, including: 

  • Your financial stability: Ensure your own immediate and short-term financial needs are being met before providing a living inheritance.
  • Your retirement plan: Make securing your own long-term financial future a priority before considering significant gifts for your children.
  • Your estate plan: Consult with an estate planning professional to ensure your actions align with your long-term goals. 
  • Your family dynamics: Consider your children’s financial situation and their ability to manage and appreciate the assets they may receive and have open and honest conversations with them.

Are there tax implications to gifting in life?

Depending on the type of gift and how it’s used, there can be tax implications so it’s important to speak with your tax advisor before giving. 

Cash: Any gifts to children or grandchildren in the form of cash while parents are alive does not need to be reported and will not be taxed as income in Canada to the recipient. 

However, if you gift cash to minor children or grandchildren and they use it for an investment, attribution rules may apply. This means that any income generated from those investments may be attributed back to you for tax purposes – even though the investment is no longer owned by you. 

Other assets: If you choose to gift an asset in the form of real estate — like a second home or cottage, or a stock portfolio — you may have to pay capital gains tax if that asset has appreciated in value. Capital gains are the profits you realize by selling an asset. So even if you give a property to your kids without money exchanging hands, that asset is deemed to have been sold at fair market value and 50% of the total capital gains will be included in your income for tax purposes. 

Will giving to my kids have a negative effect on motivation to create their own wealth?

While passing on money to your children or grandchildren may provide a financial safety net, some parents may be worried that it may diminish the recipients’ drive to work hard and pursue their own financial independence. 

Here are some tips to help avoid that: 

  1. Teach financial literacy. Ensure your children understand the basics of personal finance, including budgeting, investing, taxes and managing money. Being financially educated will empower them to make smarter financial decisions and help develop a strong foundation to build their own wealth. 
  2. Encourage a strong work ethic and other values. Instill in your children the importance of hard work, perseverance and the satisfaction that comes from achieving goals through their own abilities and hard work. Foster a supportive family environment that values hard work, personal growth and self-reliance and discourages overspending. 
  3. Set realistic experiences. Manage your kids’ expectations by talking about the responsibilities that come with wealth. Inheriting wealth isn’t a guarantee of success, it’s an opportunity. 
  4. Promote charitable giving. Encourage your kids to use their wealth and resources to make a positive impact on society through philanthropy. This can help them develop a sense of purpose and understand the value of wealth beyond personal gain.  

Get the right advice

If your personal financial situation allows it, passing your wealth to your children or grandchildren during your lifetime is a wonderful way to see the impact of your generosity. It’s also an opportunity to teach them about financial literacy and the responsibility and management that comes with acquired wealth.

Ready to get started? Talk to us today about how you can create a giving plan.