Economists estimate that before the end of this decade, the baby-boomers will have transferred around $1 trillion to the next generation. It would be the largest intergenerational wealth transfer in Canadian history.
While the heirs will be receiving a large proportion of this transfer after their parents have passed away, a growing number of parents are thinking about transferring at least part of their assets while they are still in good health.
Two good reasons to do it
There are some good reasons for making the transfer during your lifetime.
Now is when they need it
The numbers show that, in particular, purchasing a first home is much harder now than it used to be. Higher borrowing costs mean that young families have to save up a substantial down payment if they want their monthly payments to be affordable.
In the graph below, the housing affordability index is based on the percentage of income a household spends on accommodation: the higher it is, the harder it is to afford home ownership.
- You will be there to offer guidance
According to some surveys, many parents fear that their children do not yet have the financial knowledge needed to manage their inheritance. If you transfer this wealth during your lifetime, you will be there to provide support.
Two good reasons not to do it
On the other hand, there are also good reasons not to make the transfer during your lifetime.
- You might not be able to afford it
As life expectancy rises, parents will need to draw on their savings for much longer than in the past, and the expenses incurred in these final years may be greater than expected. It’s not too unusual for children to end up providing financial support for their parents at a certain age. At that point, the intergenerational transfer is happening in reverse.
- It may not be what they want from you
There are a number of indications that the younger generations have a different concept of value than their parents. For example, they might find it more important to make their own choices about where and how they work, to develop business projects or to manage their time in a way that they find rewarding. Perhaps they would rather have support for these projects.
How to do it
From this perspective, it might be a good idea to talk things over with your kids, and with your advisor, to determine the most appropriate strategy. Afterwards, if you’re still thinking about a transfer during your lifetime, your advisor can help you explore the various ways of proceeding.
You can give your children any amount of cash you want – to make a down payment on a home, for instance. This gift would not be taxable in their hands. However, be aware that if you had to first make withdrawals from your registered retirement savings plan (RRSP) or registered retirement income fund (RRIF), sell unregistered investments or surrender an insurance policy to obtain the needed cash, you could be taxed.
Giving a TFSA
You can’t transfer your tax-free savings account (TFSA), nor can you contribute to your children’s TFSAs. On the other hand, you could withdraw funds from your TFSA to make a cash gift, and this withdrawal would not be taxable. If you have a significant amount in your TFSA, this is the most tax-efficient way of freeing up money to transfer to your children.
Giving an RRSP or RRIF
You can’t transfer your RRSP or RRIF to your children, nor can you contribute to their RRSPs. You would have to first make a withdrawal, which would be taxable, and then give them the cash.
Giving real estate
If you make a big decision to give your principal home to your children while you go to live somewhere else, this gift will not be taxable in your hands or theirs. However, if you were to give them a second home or rental property, you would have to declare a capital gain based on the property’s fair market value and pay the applicable tax.
Giving an FHSA
The tax-free first home savings account (FHSA) is a way of quickly saving money in a tax-sheltered environment in order to purchase a home. You can’t contribute to your children’s FHSA, but you can give them money to make a contribution, which would also entitle them to a tax deduction.
Giving an RESP
You can contribute to a registered education savings plan for your grandchildren so that your children don’t have to. Since this money will grow in a tax-sheltered environment over the years, it’s an efficient form of intergenerational transfer that will benefit the next two generations.
Giving life insurance
If you have a life insurance policy, it is possible, under certain conditions, to transfer your interest in this policy to your children or grandchildren, tax free. The tax rules around this type of transfer are complicated, however, so you would do well to get some solid advice.
Setting up an inter vivos trust
A trust is a legal entity separate from yourself and your children. It is formed of three pillars: the settlor, i.e. the creator, who transfers assets into the trust; the trustee, who controls the trust and manages the assets; and the beneficiary, who benefits from the assets. A trust may be testamentary, i.e., created at death, or not, in which case it is called an “inter vivos” trust or living trust. This efficient wealth transfer and sharing tool is also complex and costly, and generally most suitable for high-net-worth individuals such as business owners, wealthy professionals or owners of multiple rental properties.
As we can see, there are a lot of “whys” and “hows” involved in the matter of transferring assets during your lifetime. Make sure you get the right advice so that you can make the right decisions.
The following sources were used to prepare this article:
Bank of Canada, “Real estate market: Definitions, graphs and data.”
Turbotax Hub, “Tax Tip: If I Give Cash to My Kids, Is It Tax Deductible in Canada?.”
Conseiller, “La transmission d’une résidence aux prochaines générations.”
Desjardins, “What you need to know about RESPs.”
Get Smarter About Money, “I have an RRSP – can I transfer it to my (non-spouse) partner’s name? If so, how does that work?”
La Presse, “Le CELIAPP en 12 questions.”
Manuvie, “Transfers of personally-owned life insurance.”
QTrade, “Fundamentals of trusts».
The Globe and Mail, “What to say if your adult kids ask for their inheritance early.”
Wealth Professionals, “The huge pitfall that could disrupt Canada's trillion-dollar wealth transfer.”