Dec. 29, 2021 "Why cash isn't always the best gift, especially when it comes to your kids": Today I found this article by Jason Heath in the Financial Post:
Instead of giving your children a gift of cash, pay an expense for them
Research has shown that when young children give a gift to someone, it makes them even happier than when they receive a gift themselves.
Parents know this feeling well, especially at this time of year, when they shower their kids with presents. Those inclined to give cash, however, may want to think twice, even if their children are all grown up.
Opening a bank account for a young child is a good idea but leaving those savings sitting in cash may not be best.
One hundred dollars per year added to a chequing account will be $1,800 after 18 years.
In a savings account, it could amount to $1,981 at a one per cent interest rate.
Socked away in stocks for 18 years at a six per cent return, the same savings could be $3,474
— nearly twice as much as the chequing account.
You can open an informal trust account at a brokerage to buy mutual funds, stocks, or exchange traded funds for a minor child, but beware the attribution rules.
If an adult gifts money to a child, grandchild, niece, or nephew who is under the age of 18, and that minor invests the money, any income earned subsequently is attributed back to the adult.
Income in this context is defined as interest or dividends, and the attribution requires that income is reported by and taxed to the adult on their tax return.
Capital gains, however, are not subject to income attribution. So, it can be more tax efficient for a minor to buy stocks or growth funds than GICs and Canada Savings Bonds.
Most people should not have trust accounts for their children unless they have a lot of taxable non-registered investments. In a case like this, a formal trust can be established with a lawyer and funded using a prescribed-rate loan to avoid attribution and have the income taxed to low-income minors by giving them the income or spending it on their behalf.
Formal trusts also provide greater control and protection after a child has reached the age of majority and would otherwise have access to an informal trust account for them.
Most parents and grandparents would be better off opening an RESP in their own name for their minor children or grandchildren instead of putting money in a bank or trust account in a child’s name.
RESP investments grow tax-deferred but more importantly contributions qualify for a 20 per cent Canada Education Savings Grant on up to $2,500 in annual contributions (plus up to $2,500 in previously missed contributions).
The 20 per cent instant return on investment makes an RESP superior to an informal or formal trust and is a great way to save for college, university, or trade school costs in the future.
Another alternative to giving cash to a child is to keep the money and instead put it in your own TFSA. It could be easier than investing the funds in an informal trust account or establishing a formal trust, plus the income and growth are tax free.
You could buy an investment that differs from your own TFSA investments to distinguish the savings from your own, or instead open a separate account altogether.
For adult children, there are reasons to think twice about a gift of cash as well. It is common for parents to give money to their children to help with a home down payment. In fact, CIBC recently estimated that nearly one third of first-time homebuyers across the country got a gift from their parents and the average gift was for $82,000. In expensive cities like Vancouver and Toronto, the average gifts were a whopping $210,000 and $175,000, respectively.
There are two reasons for parents to think twice about large gifts to their adult children. First, a parent should be careful about overcommitting and giving money they may someday need back.
If the gift is necessary for a child to qualify for their mortgage, that is a good indication they are already stretched financially, and they could be hard-pressed to make their mortgage payments let alone repay you if you needed the money.
Second, a gift to a child could be exposed to a division of assets in the event your child has a relationship breakdown like a separation or divorce.
The rules differ from province to province and based on other factors, but some of your contribution to a matrimonial home could end up going to your ex-son- or daughter-in-law.
Instead of a gift, you could consider a loan, even if the loan is at 0 per cent interest and there are never any repayments (only upon demand or upon your death, for example). At least the initial capital could be protected especially if the amount is significant. However, some banks require gift letters from parents to qualify their children for a mortgage, and inter-family loans can be awkward with in-laws.
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I am a big fan of parents helping their children indirectly. So, instead of giving them a gift of cash, pay an expense for them. That expense could even be an expense they may not otherwise incur.
For a spendthrift, it may be paying for life or disability insurance premiums for them or contributing to an RESP for their children (your grandchildren).
For a child who is frugal but deserves an indulgence, consider a gift certificate for a spa or a housekeeper — something they may not otherwise splurge on themselves.
Another alternative to giving cash is to give assets.
If a parent transfers capital assets like investments or a cottage to a child, that transfer generally takes place at fair market value and could trigger capital gains tax for the giftor.
That consideration aside, it may be a child is more likely to keep their 10 bank shares invested than to avoid the temptation to spend $1,000 of cash.
So, full disclosure here. I grew up getting a $50 bill in a Christmas card from my Nana and Papa every year. I got a cheque from my parents to help me with my first home down payment. My teen and pre-teen kids got cash in their stockings this year for the first time. And
I am personally in favour of giving money to kids (and charity) while you are alive instead of solely upon your death.
Giving to your kids is okay, within reason, so long as you do not compromise your own financial security. The point is there may be better ways to give to them beyond putting cash in their bank account or possibly even preferable to giving them money directly or without consideration for tax, family law, or other issues.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
Why cash isn't always the best gift, especially when it comes to your kids | Financial Post
Useless generic financial advise that does not apply to most people. Children have to learn about finance. Give them some cash, let them deposit some of it if they want, invest some if they want.
They have to learn how to use money, and not be protected as though they don't know what they are doing. Better to waste $50 as a teenager, and learn a lesson, rather than lose $5000 when in their twenties because they were coddled as kids and don't know how to manage things on their own.
Jul. 4, 2022 "What the Bank of Mom and Dad should consider when dispensing money — especially if it might want to be paid back someday": Today I found this article by Jason Heath on the Financial Post:
A recent Abacus poll for the Ontario Real Estate Association found that 41 per cent of parents of children aged 18 to 38 chipped in to help finance their home purchase.
Whether parents are gifting or loaning money to their children, there are income tax, family law and estate planning factors to keep in mind.
There are generally no tax implications of giving cash to your children. Gifts to adult children are neither taxable to them nor subject to income attribution in Canada, though there may be gift or estate tax implications for U.S. citizens in Canada.
If you transfer an asset to a child that has appreciated in value, this may trigger a capital gain for you.
Assets like stocks or real estate have a deemed disposition at their fair market value even if you gift them.
If the asset subsequently produces income for your children, that income is taxable to them.
One exception is with private company shares, as tax on split income (TOSI) rules may apply to subsequent dividends paid to your children.
You do not need to charge interest on a loan to a child, but you can if you so choose. If you charge interest, you should set the parameters up front. One option might be to base it on the Bank of Canada prime rate, which is currently 3.7 per cent. This is a reasonably competitive interest rate that is in line with or cheaper than most line of credit rates.
Interest paid to you on a private loan is taxable just as if you had a savings account or bought a GIC or bond. Even if the interest is accrued and not actually paid to you, it should be reported at least annually on the anniversary date of the loan.
Documenting a loan to a child has many benefits.
It can help avoid a dispute later on which is important when you mix money and family.
But there may also be benefits from a family law or estate planning perspective.
Property rights when a marriage breaks down are dealt with provincially. Several provinces have an equal right to possession of a matrimonial home for spouses.
If a parent gifts funds that are used to purchase a home for their child and their spouse, there may not be protection in the event the relationship ends. If a loan is documented, a parent may be better able to keep the funds in the family.
There can be other advantages to documenting loans to children.
Tracking loans can help with estate planning. If you have more than one child and advance funds at different times or in different amounts, a loan agreement can ensure the loan is repayable to your estate and reduces a child’s inheritance accordingly.
This can ensure an equal distribution amongst your children even if there have been unequal loans during your life.
If you make substantial loans, and you live in a province with high probate fees, you may be able to prepare multiple wills. Your primary will deals with assets like bank accounts and real estate that may be subject to probate. Your secondary will deals with assets like private loans that do not need probate.
Another reason to document loans to children is in the event you need to call the loan. An example could be if you develop a health issue that results in significant long-term care costs.
You may never require or request repayment, but it can be a safety net for a retiree who chooses to or is asked to provide financial support for a child.
Loans to children can also result in greater tax efficiency for a family. If your children have RRSP or TFSA room, lending them funds to make these tax deductible or tax free contributions can save a family tax. This is especially true if you have funds available in a non-registered account that is generating taxable investment income for you.
If a parent helps a child by contributing funds for them to purchase a home, a mortgage lender often requires a gift letter. This letter requires the parent to confirm in writing that the amount is a gift to their child and does not require repayment.
Lenders do this to ensure they are the only debtor that the borrower has to worry about making payments to each month. This may limit a parent’s ability to document a loan to their children.
No matter how much parents want to help their children to buy a home, it is important to consider that if a bank will not lend them enough to buy a home on their own, there is probably a reason for it.
Their cash flow may be tight enough paying their mortgage let alone making any potential repayments to parents.
Now that inflation is tracking nearly eight per cent year over year and there are risks of an economic slowdown as well, this could have a negative impact on over-indebted young homeowners. A higher cost of living coupled with a reduced income or job loss could cause a borrower to fall behind. Real estate prices are also starting to ease so even a slight decline could wipe out a new home buyer’s equity.
There can be benefits to gifting or loaning funds to a child during your life, when they are young and may need the money more, and you are alive to see it.
Parents who are loaning money to their children should be careful about loaning more money than they themselves can afford to lose.
They should also consider the income tax, family law, and estate planning implications to determine the best arrangement for them and their family.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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