Lifetime gifting from the heart: Beyond tax and probate savings

Gifts, by their very nature, come without any strings attached. Once the gift is made, you relinquish all control over it and the recipient cannot be bound by any underlying terms and conditions to use it. As such, mastering the art of letting go is a key component of gifting. If you are expecting something in return or want a say in how the gift should be used by the recipient, gifting might not be the right fit for you.

While keeping in mind that you cannot claim back a gift, it is crucial to consider your own financial needs, future goals and any potential changes in circumstances before making a substantial gift. Think of it as making sure you have enough gas in your tank to get you to your desired destinations while taking into account some potential detours. It is generally recommended to gift assets that you will not need over your lifetime. Simply ask yourself: Would I sacrifice my financial well-being, retirement goals or potential healthcare needs over a birthday gift? Your Edward Jones advisor can help you assess your financial situation and make informed decisions about gifting without compromising your own long-term needs and goals.

Many Canadians believe that they can effectively income split and reduce their overall taxes by gifting funds to lower-income earning family members who can subsequently invest the funds and benefit from their lower tax rate. Although this may be true in certain circumstances, attribution rules in the Income Tax Act apply to gifts made to certain related individuals, which stipulate that any investment income (or losses) and/or capital gains (or losses) earned on gifts can ultimately be attributed back to the giver for tax purposes, regardless of loss of control over the gifted asset. Here is a general overview of how attribution rules can impact a giver, depending on who the recipient of the gift is:

It is worth noting that if the recipient reinvests the income that was subject to attribution rules and the reinvested amount generates income, this second-generation income may be taxed in the recipient's hands without being attributed back to the giver.

Keeping this information in mind, if you have funds in a non-registered portfolio that are being taxed at your high tax rate, you may consider gifting some funds to lower-earning adult children to achieve effective income splitting. Not only could this give your adult child a head start on their financial journey, but any income earned, or capital gains realized on the investments will be taxed at their lower tax rate without being attributed back to you. Don't forget to work with your Edward Jones financial advisor to help ensure that you can continue meeting your own lifetime needs before making a gift.

Attribution rules in the Income Tax Act apply to gifts made to certain related individuals, which stipulate that any investment income (or losses) and/or capital gains (or losses) earned on gifts can ultimately be attributed back to the giver for tax purposes, regardless of loss of control over the gifted asset.

Attribution rules are complex and have several inter-dependencies as well as exceptions. Additionally, there are other rules in the Income Tax Act that could further impact income splitting efforts depending on numerous factors. Before making a gift to a loved one, it is imperative to consult with a tax professional to understand how tax legislation may impact your gifting goals.

Donating to charities while alive is a powerful way to support causes that matter to you and witness first-hand how your wealth can assist them in their mission. This can extend the impact of your legacy beyond your immediate circle by leaving a lasting imprint on lives of those you've never met and helping shape the future of healthcare, education, social justice and beyond. Building a strategic philanthropic plan that aligns with your family's values and goals can also have a ripple effect on the next generation. By encouraging your loved ones to participate in your family's philanthropic vision and celebrating the profound impact of your charitable efforts together, you can inspire them to continue carrying forward your philanthropic legacy. In Canada, your charitable giving may also carry a tax advantage. For instance, by making in-kind donations of publicly traded securities to registered charities, you may not be subject to capital gains tax on any accrued gain associated with those investments. When claiming a charitable donation tax credit, an annual limit is applicable, which generally sits at 75% of your net income for the tax year. However, it is important to note that the government has further tightened Alternative Minimum Tax rules for high-income earners making significant charitable donations and tax advice should be sought to further understand its implications. Your Edward Jones financial advisor in cooperation with our Client Consultation Group can help you through the process of building a strategic philanthropic plan.

While you should always keep in mind if and how various tax rules will govern the taxation of income (or losses) and capital gains (or losses) on the gift, it is equally important to recognize that there can be immediate tax implications for you upon transfer of the gift depending on its source.

Cash Gifts

If you make a cash gift from a readily available source of liquid funds such as your chequing account, there are generally no immediate tax implications in Canada because you would be gifting after-tax dollars. Since there is no "gift tax" in Canada nor limits on how much you can gift, there are no tax reporting requirements for yourself nor the recipient.

Non-registered investments, real estate property and other assets with unrealized gain

Unlike cash gifts, there may be tax and reporting implications for you when gifting capital property that has increased in value. Gifting investments in a non-registered portfolio, real estate property besides your principal residence or other capital assets that have an unrealized gain to someone other than your spouse or common-law partner may be regarded as a sale at fair market value for tax purposes. Although no sale technically occurred, you will nonetheless be subject to capital gains tax on the increased value of the asset on the date of transfer.

The Income Tax Act does provide for an exception for transfers of capital property to a spouse, common-law partner or spousal trust, which can be done on a tax deferred basis as long as all specific requirements are met. However, keep in mind that attribution rules apply to spouses and common-law partners. For instance, if your spouse or common-law partner subsequently disposes of the gifted asset and triggers a capital gain, it may be attributed back to you for tax purposes.

In the past, when an individual disposed of capital property, 50% of capital gains were subject to tax at their marginal tax rate. In the 2024 Federal Budget, the Government of Canada proposed changes to the taxation of capital gains and two distinct inclusion rates can now apply depending on the amount of capital gain declared:

Prior to making a gift of capital property that has increased in value, it is important to receive appropriate advice from your tax advisor to understand how these changes and other tax rules may affect you and whether any further planning may be appropriate.

RRSP and RRIF

So long as your Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF) are not locked-in plans, you can make withdrawals before your retirement and subsequently gift them to a loved one. However, if you make withdrawals out of your RRSP or RRIF, those funds may be subject to a withholding tax and will be taxed as income in the year of withdrawal at your marginal tax rate. Keep in mind that a three-year attribution rule comes into play when withdrawing funds out of Spousal RRSP. Consequently, timing matters if you do not want to have the withdrawals taxed at the contributing spouse's higher marginal tax rate.

TFSA

Making a withdrawal from your Tax-Free Savings Account (TFSA) to fund a gift will not be subject to tax given the tax-free nature of this type of account. The amount withdrawn is usually added back to your available TFSA contribution room at the beginning of the following calendar year. When gifting funds from a TFSA, it is crucial to track your withdrawals and contributions carefully, because if you re-contribute the withdrawal amount in the same calendar year and do not have sufficient contribution room available from previous years, you might face an over-contribution penalty. 

It is important to recognize that taxes on certain assets will inevitably be due whether you choose to gift them during your lifetime or at death.

Upon death, you are deemed to have disposed of all your assets at their fair market value immediately before your death even though no sale actually occurred. At that time, any associated gains will be taxed, unless the assets can be rolled over to a surviving spouse on a tax-deferred basis. However, tax deferral is not eternal, and merely postpones the tax liability until the surviving spouse's death, which may result in heavier tax burden as the assets will continue to grow in value over the course of their lifetime. Bottom line is that taxes will be due at death on growth.

If you, on the other hand, choose to gift assets you do not need and that are likely to increase in value over the years, those assets will not form part of your estate nor be subject to taxation upon your death. Instead, you would absorb the tax now, which might be lesser than the tax burden due upon your death if you had kept assets that continue to grow in value. This way, your loved ones can benefit from the gift now, which will continue to increase in value in their hands. When they choose to dispose of the gift in the future, the growth from the date of gift will be taxed at their tax rate. Also, keep in mind that the gifted asset will no longer form part of your estate, resulting in probate fee savings.

Besides that, you can gift your assets strategically to allow your loved ones to benefit from certain tax benefits. For instance, you can consider gifting funds to your adult children or grandchildren for them to contribute to their own TFSA. This will allow them to take advantage of tax-free growth on investment income and build up their own portfolio. You can also consider turning your gift into a RESP contribution for your child, which can help them save for their post-secondary education. Although contributions to a RESP do not benefit from a tax-deduction, if withdrawals are taxable, they may be taxed in your child's hands as opposed to yours when they enroll in a qualifying education program. You may also consider gifting funds to an adult child or grandchild for them to contribute to a First Home Savings Account. Not only are contributions to an FHSA tax deductible for the adult child or grandchild, but they benefit from tax-free growth and tax-free withdrawals when used to purchase a qualifying first home.

If fair means equal to you, it is important to consider whether lifetime gifting can lead to inequity when your estate is eventually divided among loved ones. If you do not have an opportunity to balance lifetime gifts before death, the ultimate distribution of your estate assets may not align with your equalization wishes as one person may ultimately receive more than others. This may occur, for instance, when you help an older child with the purchase of their first home but do not have a chance to offer the same help to a younger child before your passing. If your Will provides for an equal distribution between all children, the child that got assistance to purchase a home may receive more than the one that did not. If you want to gift during your lifetime and ensure that loved ones are equally treated upon death, you may consider adopting the approach that when you gift to one, you gift equally to all at the same time. If this proves challenging to achieve, you may consider reviewing your gifting intentions and estate distribution goals with your legal advisor to, where possible, account for lifetime gifts made to a given child in case other children do not get to benefit from gifts of equal value.

Remember, the recipient becomes the legal owner of the gifted asset, and you lose all control over it. This means the gifted assets may ultimately be exposed to potential creditor claims against the recipient for any outstanding debts they might have or debts they might later incur. If your recipient is tangled up with creditors or likely to be in the future, you might want to think twice before making an outright gift as they might not be the one that ends up enjoying it. Additionally, in the event of a separation or divorce, an outright gift may be subject to division with an ex-partner depending on several factors. For instance, the recipient may hinder the opportunity to protect a gift from becoming shareable in the event of a relationship breakdown by using it to purchase a matrimonial home. If you have concerns about any of these potential claims, it is recommended to seek legal advice before making an outright gift.