As others have previously noted on this blog, over the coming years, we will be witnessing an unprecedent transfer of wealth from one generation to the next. While much will be transferring by way of inheritance, some who are in a position to, might wish to consider transferring assets to their families and others while they are still alive.
When deciding whether to make lifetime gifts, the first factor to consider is whether one is in such a position. Making gifts while still alive will reduce the overall value of one’s estate, which may be beneficial for some (as discussed below), however, doing so can also negatively impact one’s financial situation while still alive. Therefore, it is important to carefully consider one’s personal circumstances and factor in worst-case scenarios to ensure one’s own needs are taken care of first, and then to determine how much, if any at all, can be gifted.
Next, one might want to consider the possible benefits of making lifetime gifts. In decreasing the overall value of one’s estate, a benefit may be, depending on the circumstances, a reduction of taxes payable upon death. While we do not have an inheritance/death tax in Canada, probate fees may be payable depending on the types of assets and/or estate planning done. In Ontario, where probate fees are relatively higher than in other provinces, making lifetime gifts could be one of a number of probate planning strategies worth considering.
In addition to reducing the probate fees that will be payable, gifting certain assets during one’s lifetime could also reduce the income tax payable upon death. For example, one might decide to gift a family cottage to an adult child. Doing so would trigger capital gains while the parent is still alive, however, if it is anticipated that the value will increase substantially before the parent’s death, the tax on the capital gains triggered may be lower if the cottage is gifted before the value increases.
Finally, there are of course other reasons to make lifetime gifts that are unrelated to tax-planning. For instance, one might want to consider the impact that could be made on the lives of loved ones by not delaying giving until death. A lifetime gift might, for example, assist a relative in paying for an education or purchasing a first home that they would otherwise not be able to afford.
Addressing possible consequences
When deciding to make a lifetime gift, one would be well advised to consult professional advice to avoid any possible unexpected consequences. For example, gifting capital property (such as, again, a family cottage) during one’s lifetime, could result in double taxation, as a result of the application of section 69 of the Income Tax Act, if proper care is not taken.
When making a gift, particularly to adult children, it is important to consider the possible family law implications. For instance, depending on personal circumstances and family dynamics, one might need to consider strategies for better protecting gifts to adult children, in the event of relationship breakdown.
Whether one chooses to transfer wealth during one’s lifetime or upon death, the decision is one that should hinge on thorough consideration and appropriate planning. After all, like with most things in life, what works for one person will not necessarily work for all.