Gifting and Leaving Money to Your Grandchild

Many grandparents ask me about the tax and practical ramifications of gifting or bequeathing money or assets to their grandchildren. Some wish to make gifts while they are alive, others choose to make gifts upon their passing, and still others give both while alive and after passing.

I wrote the first draft of this blog post prior to COVID -19, but it is more relevant than ever, given many people have been laid off, lost their jobs or been set back financially, and many grandparents want to help them until they regain their financial footing. Today I will discuss some of the tax and other planning considerations for grandparents wishing to make these gifts or transfers.

Please note for brevity, I will use “grandparent” in lieu of “grandparent/grandparents” and “child” in lieu of “child/children” where applicable.

Tax Considerations

In Canada, unlike the United States, there is currently no gift tax. (Here’s hoping this remains the case.) While there may not be a gift tax, a grandparent may need to take specific steps for effective tax planning. Remember, you should never make a gift that puts your own retirement finances at risk.

Deemed Disposition

The deemed disposition rules are one of the tax issues that apply to gifts. A grandparent will be subject to a deemed disposition tax where they gift or transfer an asset (other than cash) that has appreciated in value to a grandchild, as the CRA will tax the capital gain.

For example, Grandma Johnson is very tech savvy and purchased 100 Shopify shares at $250, which are now worth $1,200 or so a share. She decides to gift the shares to her grandson Tom. Grandma Johnson will have a deemed disposition, resulting in a capital gain of $95,000 ($1,200-250 x 100 shares). 

In English, this means she will have to report a capital gain on her personal tax return of $95,000, even though she gifted the shares and did not sell them. If she is a high-rate taxpayer, she will owe approximately $25,000 in tax on shares she did not receive any money for. Thus, she potentially has a cash flow issue.

The folly of gifting a principal residence

Occasionally a grandparent thinks they will save money on tax and probate by transferring or gifting their principal residence (PR), or a part of it, to their grandchildren.

In truth, a grandparent generally should not gift a principal residence, as any gain on disposition of the PR will be tax-free as long as they continue to own and live in the PR (in addition, typically, a grandparent will need most if not all the value of their home to fund their retirement). While the deemed disposition of their PR in most cases will be tax-free, the grandparent will lose their principal residence exemption going forward on the portion of their PR that they transferred to the grandchild. Not only that - the grandchild will be taxable on any future growth of their share of the PR, assuming the grandparent continues to live in the home and the grandchild does not move into the house.  

Appreciated assets left in a will 

If a grandparent leaves appreciated assets in their will to a grandchild, the grandparent will again have a deemed disposition (this time triggered by their death as opposed to a gift) that must be reported on their terminal tax return (January 1 to date of death).

Takeaway #1 - You will generally want to gift cash. If you wish to gift assets with appreciated values, ensure you have enough excess cash to pay the income tax on the deemed disposition and you do not put your own retirement lifestyle at risk. You should also speak to your financial advisor or accountant before undertaking any substantial gift.

Takeaway #2 - Never transfer your home without first obtaining professional tax advice.

Attribution

Where a gift of money or assets is made during a grandparent’s lifetime to a minor child (under 18 years old), the grandparent will be subject to attribution on the gift, as well as the tax on the deemed disposition (on appreciated assets other than cash) discussed above.

This means that the grandparent reports the income – dividends or interest, for example – and pays the tax at the grandparent’s marginal rate, not at the grandchild’s tax rate. For example, if you gift marketable securities that pay a dividend of $500 a year, you pay tax on the $500 dividend.

In summary, capital gains realized by a minor child are not subject to attribution, but income such as interest and dividends is subject to attribution. There is no attribution if your grandchild is 18 and over. 

Attribution on assets left in a will 

Where a grandparent passes away and assets are bequeathed to a grandchild, there is no future attribution of income.

Takeaway #3 – If you intend to gift marketable securities to your minor grandchild, it may make sense to gift non-dividend paying stocks to avoid the attribution rules on dividends. This is not a rule, but an option to consider.

Attribution – RESPs, TFSAs and RRSPs

For children 18 years old and over, there is no attribution if you contribute to their Registered Education Savings Plan (RESP), Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). A minor child (under 18) cannot have a TFSA, so attribution is a moot point. However, assuming they have contribution room, a minor can have an RRSP and there is attribution on gifts for RRSP contributions. There is no attribution on RESP contributions on behalf of a minor.

See the detailed discussion in Part 2 of this post (in two weeks) for traps and tax considerations before making these contributions.

Avoiding attribution – Prescribed rate loans

A grandparent can avoid the attribution rules by making a prescribed interest rate loan (the current rate is 1%) to a family trust. Prescribed rate loans are not subject to the Tax on Split Income (TOSI) rules.

Note, when I say trust above, I mean a properly set-up legal trust, not an informal “in-trust” account in the grandparent’s name. Informal in-trust accounts are not legal trusts and can cause unintended income tax and family issues and should be avoided.

Family Law

Grandparents (and parents) should always obtain family law advice for significant gifts. The laws are different for each province. In general, most gifts or inheritances are excluded property when the funds are not co-mingled or used for a matrimonial home; however, always first check with your family lawyer.

Grandparents often lend or gift grandchildren money to assist them in buying a house. There are various trips and traps when the loan is not legally documented and the interest on the loan not paid.

Takeaway #4 – Each province has its own Family Law Act and you should obtain family law advice for any significant gift or loan of cash made to a grandchild. Doing so will hopefully avoid your grandchild losing part of the value of that gift upon a marital break-up because the gift or loan was not property set up or the grandchild did not understand how to keep the property excluded.

That's all for Part 1 of this key topic that I get asked about a lot. In Part 2, we'll cover gifting by grandparents using a Registered Education Savings Plan (RESP), Tax-Free Savings Account (TFSA), or Registered Retirement Savings Plan (RRSP). We will also briefly discuss estate planning considerations for grandparents.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

The Best of The Blunt Bean Counter - Personal Use Property - Taxable even if the Picasso Walks Out the Door

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. In March, 2011 I wrote this blog post on personal use property and how many families tend to "ignore" these type of items for income tax and probate purposes.

Since 2011, this has become an even larger issue in Ontario, to name one province, as recent legislation has increased the liability of executors. So if you are an executor, tread carefully with respect to Personal Use Property such as art and collectibles.

Personal Use Property - Taxable even if the Picasso Walks Out the Door

I will start today’s blog with a question. What do stamps, duck decoys, hockey cards, dolls, coins, comics, art, books, toys and lamps have in common?

If you answered that the collection of these items are hobbies, you are partially correct. What you may not know is, that these hobbies also generate some of the most valuable collectibles in the world.

When a collector dies and leaves these types of collectibles to the next generation, the collectibles can cause rifts among family members. The rifts may occur in regard to which child is entitled to ownership of which collectible and whether the income tax liability related to these collectibles should be reported by the family members.

Let’s examine these issues one at a time. Many of these collectibles somehow "miss" being included in wills. I think the reason for this is two-fold. The first reason is that some parents truly do not recognize the value of some of these collectibles, and the second more likely reason is, that they do realize the value and they don't want these assets to come to the attention of the tax authorities by including them in their will (a third potential reason is that your parents frequented disco's in the 70's and they took Gloria Gaynor singing "Walk out the Door" literally- but I digress and I am showing my age).

Two issues arise when collectibles are ignored in wills:

1. The parents take a huge leap of faith that their children will sort out the ownership of these assets in a detached and non-emotional manner, which is very unlikely, especially if the collectibles have wide ranging values; and
2. The collectibles in many cases will trigger an income tax liability if the deceased was the last surviving spouse or the collectibles were not left to a surviving spouse. 

Collectibles are considered personal-use property. Personal-use property is divided into two sub-categories, one being listed personal property (“LPP”), the category most of the above collectibles fall into, and the other category being regular personal-use property (“PUP”).

PUP refers to items that are owned primarily for the personal use or enjoyment by your family and yourself. It includes all personal and household items, such as furniture, automobiles, boats, a cottage, and other similar properties. These type properties, other than the cottage or certain types of antiques and collectibles (e.g. classic automobiles), typically decline in value. You cannot claim a capital loss on PUP.

For PUP,  where the proceeds received when you sell the item are less than $1,000 (or if the market value of the item is less than $1,000 if your parent passes away) there is no capital gain or loss. Where the proceeds of disposition are greater than $1,000 (or the market value at the date a parent passes away is greater than $1,000) there maybe a capital gain. Where the proceeds are greater than $1,000 (or the market value greater than $1,000 when a parent passes away), the adjusted cost base (“ACB”) will be deemed to be the greater of $1,000 or the actual ACB (i.e. generally the amount originally paid) in determining any capital gain that must be reported. Thus, the Canada Revenue Agency essentially provides you with a minimum ACB of $1,000.

LPP typically increases in value over time. LPP includes all or any part of any interest in or any right to the following properties:

1. prints, etchings, drawings, paintings, sculptures, or other similar works of art; 
2. jewellery; 
3. rare folios, rare manuscripts, or rare books; 
4. stamps; and 
5. coins. 

Capital gains on LPP are calculated in the same manner as capital gains on PUP. Capital losses on LPP where the ACB exceeds the $1,000 minimum noted above, may be applied against future LPP capital gains, although as noted above, these type items tend to increase in value.

The taxation of collectibles becomes especially interesting upon the death of the last spouse to die. There is a deemed disposition of the asset at death. For example, if your parents were lucky or smart enough to have purchased art from a member of the Group of Seven many years ago for say $2,000 and the art is now worth $50,000, there would be a capital gain of $48,000 upon the death of the last spouse (assuming the art had been transferred to that spouse upon the death of the first spouse). That deemed capital gain has to be reported on the terminal income tax return of the last surviving spouse. The income tax on that gain could be as high as $12,000.

The above noted tax liability is why some families decide to let the collectibles “Walk out the Door.” However, by allowing the collectibles to walk, family members who are executors can potentially be held liable for any income tax not reported by the estate and thus, should tread carefully in distributing assets such as collectibles.

If you are an avid collector, it may make sense in some circumstances to have the collectibles initially purchased in a child’s name. You should speak to a tax professional before considering such, as you need to be careful in navigating the income attribution tax rules.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Tax Tweets of the Day for the Week Ending March 1, 2013

My Twitter tax tips for this week are listed below. My twitter handle is @bluntbeancountr. Next week will be my last for tax tips.

As in prior years, I will again be posting Confessions of a Tax Accountant, starting in late March or the first week of  April. These posts highlight contentious and/or interesting personal income tax issues that arise in my practice during tax season that I think will be of interest to my readers.

Tips for Week of February 25 - March 1, 2013

File returns in the year your child turns 18.They maybe eligible for some claims at 18 & others at 19 are based on their age 18 return #blunttaxtip

If you sold capital property in 2012 that was held prior to 1994, review whether you elected to bump the value in 1994. #blunttaxtip

Note: In 1994 the $100,000 capital gains exemption was eliminated. However, you were entitled to make a final election to use your capital gains exemption on stocks, real estate etc. Many people forget they made such an election and that their cost base on certain property is higher, which reduces the capital gain to be reported. This election was used extensively by people on their cottages. So if your parents sold their cottage in 2012 remind them to check if they made the election in 1994.

There is no attribution on #Capital Gains if you buy stocks or capital property in your child’s name. #blunttaxtip

Do you pay investment counsel fees to an #investment advisor? If so, they are deductible. #blunttaxtip

If you receive a lump sum in 2013, considering making your 2013 #RRSP contribution early. #blunttaxtip

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Personal Use Property - Taxable even if the Picasso Walks Out the Door

I will start today’s blog with a question. What do stamps, duck decoys, hockey cards, dolls, coins, comics, art, books, toys and lamps have in common?

If you answered that the collection of these items are hobbies, you are partially correct. What you may not know is, that these hobbies also generate some of the most valuable collectibles in the world.

When a collector dies and leaves these types of collectibles to the next generation, the collectibles can cause rifts amongst family members. The rifts may occur in regard to which child is entitled to ownership of which collectible and whether the income tax liability related to these collectibles should be reported by the family members.

Let’s examine these issues one at a time. Many of these collectibles somehow miss being included in wills. I think the reason for this is two-fold. The first reason is that some parents truly do not recognize the value of some of these collectibles, and the second more likely reason is, that they do realize the value and they don't want these assets to come to the attention of the tax authorities by including them in their will (a third potential reason is that your parents frequented disco's in the 70's and they took Gloria Gaynor singing "Walk out the Door" literally- but I digress and I am showing my age).

Two issues arise when collectibles are ignored in wills:

1. The parents take a huge leap of faith that their children will sort out the ownership of these assets in a detached and non-emotional manner, which is very unlikely, especially if the collectibles have wide ranging values; and
2. The collectibles in many cases will trigger an income tax liability if the deceased was the last surviving spouse or the collectibles were not left to a surviving spouse. 

Collectibles are considered personal-use property. Personal-use property is divided into two sub-categories, one being listed personal property (“LPP”), the category most of the above collectibles fall into, and the other category being regular personal-use property (“PUP”).

PUP refers to items that are owned primarily for the personal use or enjoyment by your family and yourself. It includes all personal and household items, such as furniture, automobiles, boats, a cottage, and other similar properties. These type properties, other than the cottage or certain types of antiques and collectibles (e.g. classic automobiles), typically decline in value. You cannot claim a capital loss on PUP.

For PUP,  where the proceeds received when you sell the item are less than $1,000 (or if the market value of the item is less than $1,000 if your parent passes away) there is no capital gain or loss. Where the proceeds of disposition are greater than $1,000 (or the market value at the date a parent passes away is greater than $1,000) there maybe a capital gain. Where the proceeds are greater than $1,000 (or the market value greater than $1,000 when a parent passes away), the adjusted cost base (“ACB”) will be deemed to be the greater of $1,000 or the actual ACB (i.e. generally the amount originally paid) in determining any capital gain that must be reported. Thus, the Canada Revenue Agency essentially provides you with a minimum ACB of $1,000.

LPP typically increases in value over time. LPP includes all or any part of any interest in or any right to the following properties:

1. prints, etchings, drawings, paintings, sculptures, or other similar works of art; 
2. jewellery; 
3. rare folios, rare manuscripts, or rare books; 
4. stamps; and 
5. coins. 

Capital gains on LPP are calculated in the same manner as capital gains on PUP. Capital losses on LPP where the ACB exceeds the $1,000 minimum noted above, may be applied against future LPP capital gains, although as noted above, these type items tend to increase in value.

The taxation of collectibles becomes especially interesting upon the death of the last spouse to die. There is a deemed disposition of the asset at death. For example, if your parents were lucky or smart enough to have purchased art from a member of the Group of Seven many years ago for say $2,000 and the art is now worth $50,000, there would be a capital gain of $48,000 upon the death of the last spouse (assuming the art had been transferred to that spouse upon the death of the first spouse). That deemed capital gain has to be reported on the terminal income tax return of the last surviving spouse. The income tax on that gain could be as high as $11,000.

The above noted tax liability is why some families decide to let the collectibles “Walk out the Door.” However, by allowing the collectibles to walk, family members who are executors can potentially be held liable for any income tax not reported by the estate and thus, should tread carefully in distributing assets such as collectibles. (As an aside, starting next week, I will begin a three part series on executors).

If you are an avid collector, it may make sense to have the collectibles initially purchased in a child’s name. You should speak to a tax professional before considering such, as you need to be careful in navigating the income attribution tax rules.

Where the above alternative is not practical or desirable, you should ensure that you have set aside funds or even taken out life insurance in order to cover the income tax liability stemming from these collectibles that may arise upon your death.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.