When we think of estate planning, we often think of how
we want to distribute our assets upon death, whether it is to a relative or close friend, or in some cases, to charity. But what is sometimes overlooked is the opportunity to give assets away before death, which, in some cases, may be a smarter move tax-wise.
Let's say you have been fortunate enough to amass more wealth than you could possibly spend in your lifetime, given the standard of living with which you are comfortable. If you look at it globally among yourself and those you plan to benefit, retaining excess assets beyond a certain level could mean you are paying more taxes than necessary while you are alive, reducing the potential size of your estate available for loved ones or charity.
For example, assume you plan to leave your adult kids significant bequests in your will. Meanwhile, however, the kids may still have mortgages on their homes or could be in a lower tax bracket than you're in.
If you're planning to leave them money anyway and you can afford to part with the cash now instead of waiting until after you're gone, consider passing on benefits during your lifetime.
Contrary to popular belief, since we have no gift tax in Canada, you can give your kids (or for that matter, anyone) as big a gift as you want during your lifetime and the gift will be completely tax-free. Now, if you are giving them property that has gone up in value, like the family cottage or appreciated stocks, you will be deemed to have disposed of the property for fair market value and you might be liable for tax on capital gains at the time of gifting. But if you give cash or other property that hasn't gone up in value, the act of gifting itself is tax-free.
When the kids receive that gift, they could use the funds to pay off their mortgage, thus reducing the amount of non-deductible interest they are paying each year to a third-party outside lender. Parents who are nervous about doing this because they might not want to benefit the child's spouse should the marriage break down will often take back a registered mortgage on their child's home, charge no interest and perhaps forgive the mortgage down the road.
If the kids have no debt, the other benefit of giving them excess investable assets while you're alive is that if they are in a lower tax bracket than you, by changing ownership of the assets, the annual investment income will be taxed at their lower tax rates instead of being taxed in your name at a higher rate.
The potential tax savings vary based on your province of residence but in an extreme example of an Ontario parent with substantial investable assets who is in the top tax bracket and a child with no income, more than $18,000 of annual tax savings can result by having up to $132,000 of income taxed at the child's graduated rates instead of the parent's top rate.
Jamie Golombek is the managing director, tax & estate planning at CIBC Private Wealth Management in Toronto.