Gifting and Leaving Money to Your Grandchild (Part 2)

My previous blog post discussed the concept of  deemed dispositions when making gifts to grandchildren while alive and upon death. It also covered the issues of income attribution and ensuring family law is considered when making or providing for gifts. 

Today, I discuss gifting by grandparents using a Registered Education Savings Plan (RESP), Tax-Free Savings Account (TFSA), or Registered Retirement Savings Plan (RRSP). I also briefly discuss estate planning considerations for grandparents.

RESPs

RESPs are great vehicles to save for a grandchild’s education. A grandparent can contribute under their own plan for a grandchild, but it is very important for the grandparent to ensure they are not duplicating contributions made by the child’s parents.

If both a grandparent and parent have plans for a child, they must coordinate their contributions on a yearly basis. If the grandparent intends to make the annual contribution, the child's parents may not even want to bother opening a RESP for that child. Alternatively, the grandparent can just gift the yearly contribution to the parent, who then puts the money into the RESP they have set up for the child.

RESPs upon the death of a grandparent

If a grandparent (subscriber) dies, things can get very complex and deserve their own blog post.

However, here are two key things to consider in your estate planning:

1. Ensuring you have a successor subscriber so the plan can continue, or the RESP may become part of your estate.
2. A clause in your will setting out your intentions for the RESP, including whether you wish to have your estate continue making the RESP contributions.

Takeaway #1 – If you set up a RESP for your grandchild, ensure their parents don’t already have a plan. If they do have a RESP, communicate each year with them. Ensure your estate planning considers the RESP.

TFSAs

TFSAs are a great tax-free option to help your grandchildren (who are 18 or over) save for education, a house, a car, vacation or even retirement (if they can look that far ahead). 

Care should be taken to ensure you do not over-contribute to the TFSA, as penalties will apply.

TFSAs are far simpler than RESPs when giving money to a grandchild. The TFSA is set up in your grandchild’s name, so you don’t have the estate concerns you have as an RESP subscriber; however, you should not make direct contributions (you should gift the money to your grandchild to contribute), and you have no control over the TFSA and what your grandchild does with the money in their TFSA. If they wanted to, they could cash in the TFSA and travel the world - and you would have no say.

A grandparent does not require a clause in their will to deal with the TFSA. A grandparent could have a clause in their will to have their estate continue making yearly gifts equal to the TFSA contribution limit.

Takeaway #2 – Gifts to fund a TFSA for a child 18 and over are tax efficient and a great way to assist them in funding their education, home purchase or retirement savings. Just be aware, they can decide to use the money for a fancy sports car or vacation and you have no say in the matter.

RRSPs

For grandparents making gifts to grandchildren, an RRSP is like a TFSA in that it is set up in the grandchild’s name, the grandparent has no control over the RRSP. A gift for a RRSP should be on the understanding the grandchild will not touch the money until their retirement. But a grandparent has no way to enforce this.

RRSPs can be set up at any age, as long as the child has earned income and a social insurance number. Practically, there is limited tax savings value in an RRSP when a child has minimal taxable income (although there is a tax-deferred component and it can assist in teaching a grandchild about saving for retirement). A TFSA is often the better choice if you plan to gift $6,000 a year or less to your grandchild.

If you intend to gift more than $6,000 (assuming the first $6,000 goes to a TFSA), an RRSP contribution can be made equal to your grandchild’s RRSP contribution limit. It often makes sense for the grandchild to not claim an RRSP deduction until their income is higher and carry forward the contribution until they can obtain a larger tax refund. In any case, the RRSP money grows tax-free.

The grandparent and child need to ensure they do not exceed the child’s RRSP contribution limit, or penalties may apply.

Grandparent gifting to RRSP: Example

An example may help clarify the above.

Say a child works part-time, is over 18 (so has no attribution concerns) and makes $15,000 to $20,000 a year. The child’s RRSP contribution room is 18% of their annual income, so let’s say $3,000 a year for simplicity's sake (they may also have contribution room from prior years). The grandparent gives the grandchild $3,000 a year for five years to contribute to their RRSP while the child is in university. There would likely be little to no tax refund if the RRSP contribution is claimed each year while the grandchild is in school, due to tuition credits. 

But if the grandchild works full-time in the year after graduation and makes, say, $60,000, they could claim the RRSP carryforward deduction in Year 6 and obtain a refund – likely somewhere in the $4,000 to $5,000 range, while getting the tax-free growth on their RRSP assets from Day 1.

Takeaway #3 – Gifting money for a grandchild’s RRSP will typically be your last option (likely better to gift to RESP or TFSA).

Your will

A will is best discussed with an estate specialist. I will just provide a few considerations:

1. If you are leaving money to your grandchildren in your will, ensure you consider additional grandchildren that could be born after you draft your will or even after you pass away.
2. Is the bequest going to be outright or in trust? You may wish an outright gift for smaller bequests and if the grandchildren are older. If the grandchildren are younger or the bequest is large, a trust (a formal properly executed trust) will likely provide greater protection from the whims of an immature child.
3. Most legal writers suggest grandparents consider their own children’s financial circumstances, as you do not want to skip a generation from your children to your grandchildren when your own children may need the money and unintentionally create resentment with their own children.
4. At what age do you want your grandchildren to have access to the inheritance?

Takeaway #4 – There are multiple trips and traps in leaving bequests to your grandchildren. It is imperative you have an experienced estate lawyer draft your will if you are leaving substantial assets to your grandchildren.

I am finally done, and now I’ll catch my breath. Somehow one brief blog turned into two parts and almost 2,000 words. But long-time readers will not be surprised, I have never been one to buy into the conventional wisdom of keeping everything short because people have short attention spans. Anyways, stepping off my soapbox, grandparents: please consider the various issues I have discussed when considering gifts and bequests to your grandchildren.

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.

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.

Financial & Tax Planning for the Terminally Ill - Part 2

Last week I wrote about organizing your affairs should you unfortunately be diagnosed as terminally ill. Today I will discuss some financial and tax planning considerations if you have been given a finite period to live.

Probate Fees & Income Taxes

Upon death, your estate will be subject to probate fees (more properly called estate administration fees in Ontario) and income taxes.

In order to minimize your probate fees and/or income taxes, I recommend you obtain tax and/or legal advice.

Probate Planning

This type of planning is complex and if not properly executed, can lead to income tax and legal issues. I have set out below some of the considerations in respect of probate planning. Again, get advice before considering any of the following planning strategies:

Joint Tenancy

In order to avoid probate fees, many people transfer their assets into joint tenancy, with the right of survivorship. This means that upon the death of one of the joint tenants, the property passes to the other tenant automatically. The risk with this type of transfer is if the property is capital property (such as stocks or certain real estate) that has appreciated in value, the transfer (if to anyone other than your spouse) will create a deemed capital gain and income tax liability.

So for example: if you transfer 100 shares of Bell Canada that cost you $2,000, either directly or into joint tenancy with your son and those shares are worth $5,000 today, you will have to report a capital of $3,000 if transferred directly, or $1,500 if transferred into joint tenancy; even though you just transferred the shares and did not sell them on the open market.

Where you are terminally ill, the deemed disposition may not be as large an issue as for a healthy person since you may only be accelerating the income tax liability a few months or years. This deemed gain upon death is discussed in greater detail below.

If you transfer a bank account or stock into joint ownership with one of your children to help you manage your money while you are alive, that child becomes the sole owner of that account when you pass away. That child may consider the account is theirs even if that was not your intention and decide not to share it with the other siblings. This can lead to estate litigation, especially where your intention is not documented.

Gifting

Similar to the issue above with joint tenancy, when you gift property to someone other than a spouse there may be a deemed capital gain where the property has appreciated in value. Thus, if you wish to make a gift, you should consider gifting cash instead of property to avoid any income tax issues (be careful to ensure any gifts are consistent with your wishes in your will- i.e. if you split your estate equally with your three children in your will, the gift should be 1/3, 1/3,1/3, or you may need to amend your will). However, care must be taken to ensure you will not need that money to live on or pay medical bills during your illness. I suggest you only gift money you are absolutely sure you will not need to live on.

Consolidation of Accounts

Many of us have multiple bank accounts, investment accounts, RRSPs etc. If you are terminally ill it may make sense to consolidate these accounts into one or two accounts to simplify your executor’s life. You may also want to consider liquidating certain investments so your executor does not have to deal with these decisions. However, you need to consider the investment merits of liquidation versus the “ease of administration” issue.

Estate/Income Tax Planning

As a courtesy to your executor, gather up you prior tax returns and put them in a box or file cabinet and ensure you advise your executor where they are located. If you made a 1994 capital gains election (a special election for that year only, that allowed you to “bump” up the cost of certain capital property), provide a copy of that return.

Income Tax Smoothing

If you are terminally ill and have a finite period of time to live, from an income tax perspective, you will want to minimize your tax bill over the remainder or your life by smoothing your income as best as possible. Smoothing your income involves utilizing the lower marginal rates, rather than just the high rate on death. Typically this would be done by drawing on your RRSP or RRIF. This may have the secondary advantage of providing funds to live on.

Capital Gains

Upon death, if you do not leave your assets to your spouse or you are the last spouse to pass away, you have a deemed disposition of your assets at fair market value. See my blog on death and taxes for more details. You can utilize any capital losses against capital gains in the year of death and can carryback any excess capital losses for three years. In addition, where you cannot use all your capital losses on your terminal return, the losses are deductible against all income on your terminal return or the year proceeding death.

Purify capital gains exemption

The same deemed disposition rule holds true for shares in any private corporations you may own. As discussed in my blog “Corporate Small Business Owners: Beware; the Capital Gains Exemption is not a Gimme” shares you hold in a small business corporation may be offside the rules to claim the $800,000 Capital Gains Exemption (indexed to $813,600 in 2015) where you have significant cash and/or investments in your corporation. In order to meet the criteria to qualify for the capital gains exemption, it is often advisable to pay a dividend from the corporation to reduce the corporation’s cash and near cash assets. Where you have a terminal illness, it is imperative you review the status of your corporation with your accountant to ensure your company is onside the rules or is “purified” to qualify for the exemption.

Charitable Giving

Consideration should be given to any charitable contributions you wish to make upon death or while alive. Any donations made in the year of death are not subject to any limitations and are 100% deductible. The tax savings are worth approximately one-half of the actual contribution. The rules for donations made in your will were made more flexible in the 2014 budget.

Medical Expenses

Medical expenses qualify as a non-refundable tax credit. In the year of death, medical expenses may be claimed for any 24 month period including the date of the person's death, which were not claimed in a prior year. Sometimes you may wish to amend a prior year’s medical expense claim to utilize the 24 month period option. However, as you would typically have significant medical expenses if you are terminally ill, there is often not much to be gained by using the 24 month option as you would receive a full tax credit.

This topic is unpleasant and dealing with financial and tax planning may be the last thing on your mind if you are terminally ill. However, engaging in financial planning for your own demise is prudent and your final act of kindness for your family and/or executors.

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.

How much Control do I have from the Grave?

Last week I wrote a blog post on the virtues of spending some of your kid's inheritance on a family vacation while you are alive. That post reflected my personal philosophy that a parent(s) who is/are fairly certain that they will have more cash than they will require for retirement, should consider partial gifts to their children or grandchildren while alive. My rationale is simple: why not receive directly or vicariously, while alive, the pleasure and joy from those gifts, rather than giving from your grave.

  

However, I understand that viewpoint is not held by all, and that some people only wish to distribute their wealth after they die. In addition, there are some people who not only wish to wait until they die to distribute their wealth, but wish to continue to control their wealth after their death.

For a discussion on whether it is actually possible to control your wealth from the grave; today I have a guest blog post by Albert Luk, a lawyer, who is an estate and wills specialist.

How Much Control do I Have From the Grave?

If nothing else, Charles Millar had a good sense of humor. The lawyer turned entrepreneur stipulated in his will that on the ten year anniversary of his death a portion of his estate was to be given: “to the mother who has since my death given birth in Toronto to the greatest number of children…” Given Millar was a wealthy man in life, and his estate well managed in death, the baby bonus was worth approximately $750,000: a small fortune to the depression era mothers hoping to win the prize. The ensuing local baby boom would be known as The Great Stork Derby.

Charles Millar’s estate represents one end of the will planning spectrum. A testator (the legal term for the will-maker) rather whimsically plays one final practical joke on the world. On the other end of the spectrum, testators attempt to control the lives of their beneficiaries from their graves, sometimes with the best of intentions but sometimes for more sinister purposes. It is not unusual for a frustrated father-in-law to write: “To my son, I give the sum of $50,000.00 if he divorces his wife” in a will.

To testators, the question often becomes, “How much control can I assert from the grave?” To beneficiaries, the question is often asked, “Do I really have to conform to those conditions in the will?”

The answer, as usual, is that it depends. Conceptually, it is possible to give a gift with conditions. The analysis is often whether the conditions themselves survive scrutiny or how long of a reach one truly has from the grave.

A general and non-exhaustive review of the Canadian law provides the following information:

• The more uncertain the condition of the gift, the more likely the condition will fail. An Albertan case found the condition that a home be gifted as long as the beneficiary lived in it and kept it in “good condition” was too uncertain. Specifically, who defines what “good condition” means? Martha Stewart or Frank the Tank? As the condition was too ambiguous, the condition failed and the home was gifted without conditions.
• A restraint on alienation (a legal term for restricting the sale of land) is not a valid condition. A mother once attempted to divide a plot of land equally to her sons on the condition one son sell his half at a specified time and specified price. As this condition restricted the ability of either son to sell, the condition failed. The exception to this rule is that property can be left to a beneficiary only for the duration of their life.

• Conditions contrary to public policy will be struck down. Violations of public policy would include conditions which, if carried out, would be considered to be in violation of the Charter of Rights and Freedoms or require the beneficiary to commit a hate crime or engage in criminal behaviour. For example, “I give to my son the sum of $50,000 only if he renounces his homosexual lifestyle,” or, “I give my daughter the sum of $100,000 if she burns down John Smith’s farmhouse,” would be conditions struck down as being contrary to public policy (not to mention the ethics behind such conditions).

• Conditions promoting marital or family breakdowns will also be struck down. Conditions which grant a beneficiary a sum of money conditional upon leaving or divorcing his spouse or requiring a child to live with one parent have been struck down as being contrary to public policy. However, conditions prohibiting a widow or widower from marrying again or prohibiting a marriage not in accordance with religious rules, tantamount to forcing someone to convert, are valid. It is not as clear whether partial restraints on marriage are valid conditions or not. Confused? These types of restrictions are confusing and qualified advice should be sought before contemplating any such condition.

• Conditions of residence should be reviewed carefully. “I give my son $75,000.00 to return home to Mother Russia” may or may not be upheld. Often these conditions are void for being too uncertain. However, if drafted carefully, they may hold up to scrutiny.

In summary, one’s reach from the grave can be quite long if the will is properly crafted. Courts have held in the past conditions which are positive (“I give my daughter $10,000 if she graduates high school and $25,000 if she earns a university degree”) are generally enforceable. Conditions which are progressively more restrictive are correspondingly more difficult to enforce if not struck down altogether. If struck down, the gift is usually granted without some or all of the conditions.

The key is that anyone looking to impose positive or negative conditions in their will, or any beneficiary subject to conditions, should seek qualified legal advice to determine their rights.

As for The Great Stork Derby, Millar’s estate survived challenges to the clause, withstanding even Supreme Court of Canada scrutiny. He was, after all, a lawyer. Four women each won $125,000 (over $1.5 million today) having nine (!) children in the ten year period. Two women—each having had ten children, but several out of wedlock (remember, this was the 1930’s)—sued the estate and settled for $12,500 each.

Albert Luk is a lawyer at Devry Smith Frank LLP, a Toronto based law firm who act as trusted advisors and advocates for corporations, individuals and small businesses. His particular expertise is in advising owner-managers on their business affairs and planning their wills and estates. Albert can be reached directly at albert.luk@devrylaw.ca.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.