As the baby boomer generation transitions to retirement, many are carefully considering their retirement and estate plans. Central to these considerations is how to transfer wealth across generations. By 2026, Canada is expected to witness the largest intergenerational wealth transfer in its history, with approximately $1 trillion being passed from boomers to Gen Xers and millennials.
The current economic climate has further complicated these plans. High inflation, rising interest rates, and increased borrowing costs have made it difficult for younger generations to make ends meet. This has prompted many older Canadians to consider "gifting while living" as part of their estate planning, rather than waiting until death to distribute assets.
This article is the first in a two-part series exploring intergenerational wealth transfer, with a focus on both gifting during one’s lifetime and posthumous transfers. We will also touch on the attribution tax rules that come into play for certain gifting strategies.
Attribution Rules and Family Gifting
When considering gifts within a family, it's essential to understand the attribution rules, which are designed to prevent income-splitting between family members. The Income Tax Act (ITA) contains several attribution rules that apply to individuals, corporations, and trusts. For this article, we will focus on individuals and trusts and how these rules can affect gifting arrangements.
If assets are gifted to a related minor—such as a child, grandchild, niece, or nephew—any income generated by the gift is typically taxed in the hands of the parent or grandparent until the minor turns 18. However, capital gains earned on these assets are generally taxed to the child, regardless of their age. These rules also apply to gifts made via a trust.
Attribution rules generally cease at death, which is why they primarily concern gifting while living. Below is a summary of attribution rules for gifts and loans:
Type | Post-Transfer Income | Post-Transfer Capital Gains |
|---|---|---|
Gift to a Child Under 18 | Attributed to giftor | No attribution |
Gift to a Related Adult | No attribution | No attribution |
Low or No-Interest Loan to a Child Under 18 | Attributed to lender | No attribution |
Low or No-Interest Loan to a Related Adult | Attributed to lender | No attribution |
Additional Rule for Trusts | If settlor controls trust or is a beneficiary, income and capital gains are taxed to settlor | Cell |
Gifting While Living vs. Gifting at Death
Many families are now leaning toward gifting while living, in light of economic conditions. Each approach—gifting during one’s lifetime or waiting until death—has its own set of pros and cons.
Gifting While Living: Pros and Cons
Pros:
- You can see your loved ones enjoy the gift.
- Clarify your intentions, reducing the chance for future conflict.
- Possible income splitting and preservation of income-sensitive benefits.
- Helps younger generations with costs, such as housing.
- Simplifies estate planning and may reduce estate administration fees.
Cons:
- You might need the assets later in life, especially for health care.
- Gifting appreciated assets can trigger taxes earlier than anticipated.
- Adding complexity to your estate planning.
- Risk of losing control over the assets.
Gifting at Death: Pros and Cons
Pros:
- Assets remain available for your own retirement needs.
- A simplified distribution plan when all assets are handled through a will.
- Possible tax deferral.
Cons:
- Doesn't help with the current financial needs of your heirs.
- Lack of clarity or direct communication could lead to disputes.
- Higher potential for taxes and administration fees at death.
Family dynamics, personal circumstances, and goals should shape your wealth transfer strategy. In Part 2, we will dive deeper into the specific strategies for gifting both while living and at death.
Key Strategies for Gifting While Living
There are several tax-efficient strategies for inter vivos wealth transfers. Here are a few that families might consider:
1. Gifts to Minors
While the attribution rules apply to income from gifts to minors, they do not apply to capital gains. This creates a potential for income splitting, especially if the gift is used for capital-appreciating assets. Non-dividend-paying stocks or corporate class mutual funds are often a good fit for this approach.
2. Gifts to Adults
Gifts to related adults, including children and grandchildren, are not subject to the attribution rules and can be an efficient way to share wealth. However, gifting appreciated assets can trigger capital gains tax at the time of the transfer, accelerating a tax bill for the giftor.
3. Gifts via Trusts
If there are concerns about a beneficiary’s ability to manage assets, a living trust can provide a solution. Trusts allow for more control over when and how assets are distributed.
4. Fair Market Value (FMV) Exchanges
Instead of outright gifting, some parents choose to sell assets to their children at FMV. This strategy avoids attribution rules and can help with income splitting. However, caution should be exercised with below-FMV sales, which can lead to double taxation.
Planning for the Future
For families navigating these complex decisions, knowledge transfers can be as valuable as wealth transfers. Open conversations about financial literacy and wealth management will help ensure the success of any wealth transfer strategy.
Brant Financial Group is here to guide you through the nuances of estate planning, taxation, and wealth transfer strategies, ensuring you leave a lasting financial legacy for your loved ones. Stay tuned for Part 2, where we’ll cover more in-depth strategies for both gifting while living and at death.
