Strategies For Giving Assets And Income To Other Family Members
High-income taxpayers who have maximized their tax-preferred accounts may still have assets that produce highly-taxed income in their own names. Some parents worry about the tax liabilities that will result when they die and how to minimize that tax for their children. Whether current tax minimization or reducing tax on death is your priority, there are strategies and considerations to give assets and income to other family members.
RRSPs
Registered Retirement Savings Plans (RRSPs) are one of the simplest tax reduction and deferral tools for working-age Canadians. Someone who has maxed out their own RRSP can give money to their spouse, children, or grandchildren to contribute to their RRSPs. There are no adverse tax consequences, and this can result in tax reduction overall for a family.
A low-income spouse can open a spousal RRSP account for a high-income spouse to contribute to, and the high-income spouse gets to claim the tax deduction. This reduces the high-income spouse’s RRSP room, so it does not magnify the amount they can put into an RRSP. However, the low-income spouse will be able to take the withdrawals in the future* and have that income taxed in their name.
Although pension income splitting allows up to 50% of Registered Retirement Income Fund (RRIF) withdrawals to be split with a lower-income spouse, this is not available prior to age 65, so spousal RRSPs can have a value for someone who may retire earlier. Spousal RRSP contributions allow an older spouse still working after age 71 to contribute to the younger spouse’s spousal RRSP despite being too old to contribute to their own account. (RRSPs must be converted to a RRIF by the end of the calendar year the annuitant turns 71.)
*There are spousal attribution rules to be mindful of with spousal RRSPs. If a spousal RRSP contribution has been made in the current year or the previous two years, withdrawals up to the amount of the contributions during those three years will be attributed back to the contributing spouse rather than the annuitant (spouse). That means the contributor has the income taxed on their tax return, which may not be the intention.
TFSAs
There are no tax issues with giving a spouse, child, or grandchild money to invest in their Tax-Free Savings Account (TFSA). If you have taxable, non-registered investments and feel comfortable giving some money to a child, the family will benefit due to a lower tax burden overall.
A child can open a TFSA when they turn 18, and they are entitled to a full year of contribution room in that year. If you plan to give money to a child to help fund their education, a home purchase, a wedding, or just generally help them financially in the future, there may be a benefit to doing that over time and having them build their TFSA savings.
Taxable Non-registered Accounts
Here is a quick primer on attribution of income if you want to give cash or investments to a family member. Attribution can cause income to be taxed back to the person giving the money.
For a spouse, you cannot just give them money to invest. If you do and charge 0% interest or a low rate of interest, the income and capital gains all get attributed back to you. The same would apply if you just add their name to a joint account. You cannot just start splitting 50% of that income with them.
You can have a high-income spouse pay for the family expenses and have the low-income spouse save their income. The lower income spouse can open a taxable non-registered account in their name and build an investment portfolio that can be taxable to them.
Otherwise, you need to loan the money from a high-income spouse to a low-income spouse at the Canada Revenue Agency (CRA) prescribed rate—currently six per cent. The prescribed rate was one per cent for several years before rates took off, but at six per cent, it is hard to justify a prescribed rate loan between spouses.
For a minor child (someone under the age of majority in their province of residence), you cannot just give them money to invest. You typically need to open a formal or informal trust account because, beyond a bank account, a minor cannot have an investment account in their name. Remember, with a spouse, all income and capital gains get attributed back to the spouse who gave the money unless you loan it at the CRA-prescribed rate. With a minor child, the capital gains are not attributable. So, you can accomplish some income splitting with a minor child by having capital gains on stocks, mutual funds, exchange-traded funds (ETFs), and other investments that grow in value over time.
If you want to split income like interest and dividends, you need to do a prescribed-rate loan. A minor child cannot borrow money, so you can typically only do this with a discretionary family trust set up with a lawyer. There are legal and accounting fees and requirements, so you would probably only do this for pretty large amounts of money—like hundreds of thousands of dollars at least.
For an adult child, you can give them money to invest. You may not want to give them too much because you risk taking away their motivation to work hard. But that aside, if you give a child money, all income and capital gains can be taxed to them, so there is no attribution. You can easily split income with an adult child.
However, if you loan the money at 0% or a low-interest rate, there is attribution of income like interest or dividends back to you. There is no attribution of capital gains, though. There is never an attribution of capital gains from a child to their parents. If you want to loan money to an adult child, you must use the CRA-prescribed rate at the time the loan is set up; otherwise, income—but not capital gains—gets attributed.
Attribution of interest, dividends, and capital gains does not apply to tax-preferred accounts, only taxable non-registered investments.
Trusts
A trust is a relationship between a trustee and a beneficiary where a trustee holds assets on behalf of a beneficiary. High net worth investors sometimes set up discretionary family trusts to hold assets and maintain control but also for income splitting. If you loan money to a family trust at the CRA-prescribed rate, currently, six per cent, you can split interest, dividends, and capital gains with a spouse, child, or grandchild, with no attribution of income.
We may not see a lot of trusts set up for the next little while, given how high the CRA-prescribed rate is right now. But if rates drop again, prescribed rate trust planning could see a resurgence. The rate at the time the loan is established is the rate that applies thereafter, so it does not reset over time.
Business owners may continue to use trusts to acquire shares of their private corporations, though, because if you sell a qualifying small business corporation that is owned by a trust, the lifetime capital gains exemption can generally be multiplied for a spouse as well as minor adult children or grandchildren.
RESPs
Registered Education Savings Plans (RESPs) are a great tool to save for a child or grandchild’s education. The 20% government grant on contributions is appealing. You can pre-fund an RESP by contributing the lifetime maximum for a beneficiary—$50,000— but then you forgo the annual government grants.
You can only get grants on a maximum of $36,000 of contributions, though, so a lump-sum contribution of $14,000 could be considered in any year in addition to an annual $2,500 contribution to maximize tax-deferred growth.
FHSAs
First Home Savings Accounts (FHSAs) were introduced as part of the federal budget in 2023. You need to be a first-time homebuyer to use an FHSA, which is defined as someone who has not owned a home, nor has their spouse or common-law partner owned a home, in the past five years.
You can contribute up to $8,000 per year to a maximum of $40,000 in total. Contributions are tax-deductible, and the account grows tax-deferred. Accounts can stay open for up to 15 years, and withdrawals to purchase an eligible home are tax-free.
Contributions do not need to be deducted in the year they are made and can be carried forward and deducted in a future year. So, a parent or grandparent can start contributing to an FHSA when their child or grandchild turns 18 and contribute $8,000 per year for five years. The child or grandchild can use the deductions in the future when their income rises and then withdraw well into their 30s to buy a home.
Other Considerations
You can pay a salary to a family member from your sole proprietorship or corporation and deduct the salary if it is reasonable and in line with what you would otherwise pay an arm’s length third party.
Adding a family member as a shareholder of a private corporation and paying them dividends will often expose them to the Tax on Split Income (TOSI) rules and result in the income being taxed at the top tax rate. That is, unless they are actively working in the business and subject to other criteria.
Insurance is often promoted as a method to save tax and maximize an estate. It can work well with accumulated corporate savings but may need more scrutiny with personally-held non-registered assets.
Be careful about adding children’s names to your assets during your lifetime, as there can be negative tax consequences like triggering capital gains or causing a principal residence to be subject to capital gains tax in the future. It can also expose your assets to creditors or family law claims, as well as giving your children access to your assets.
If you want to gift an asset with an accumulated capital gain to a child or grandchild, that must take place at the fair market value. In other words, you cannot gift your cottage for $1 and avoid capital gains tax. This triggers a deemed sale as if the property was sold to them at the fair market value, even if no money changes hands.
Summary
There are both easier and more complex strategies to give money to family members. Some approaches may give rise to immediate capital gains tax or attribution of income back to the giftor without taking proper steps.
By doing your homework and seeking professional advice, you can be successful in spreading your wealth to other family members and keeping more after-tax wealth within your 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.