Give It Away: Financial Gifts and Tax
Give it away, give it away, give it away now
Give it away, give it away, give it away now
Give it away, give it away, give it away now*
You have reached a level of wealth that gives you a sense of contentment. You are confident that you can weather any financial storm without fear. You have a well-diversified portfolio made up of both financial securities and real property that generates more after-tax income than you can reasonably spend.
Well, that might be the case for only a very few, but still, many people have reached some level of wealth and income that gives them the confidence to give some of that wealth away. How should you do it?
Gifts to your spouse
Let’s suppose that you were the main income earner in your household and your spouse has been staying home for the bulk of his career to look after the children you have together. As a consequence, most of your household financial assets are in your name alone. You have contributed to a spousal RRSP and also given him money to contribute to his TFSA. However, you are looking for other ways that you might share your non-registered taxable assets so that some of the income that is generated is taxed in your lower income earning spouse’s hands at a lower marginal rate than you are paying.
One option you may consider is to transfer ownership of securities (e.g., stocks, bonds, or funds of stocks or bonds) to your spouse in an account that is in his name. That will not work. The interest, dividends, or realized capital gains will be attributed back to you according to Canada’s tax rules.
What about a gift of cash? If that money is used for investment purposes in a taxable account, the same attribution rules apply.
What option is available to you? Instead of a gift, a loan will work. Every quarter, the Canada Revenue Agency (CRA) sets the prescribed rate for loans to your family members. Despite recent inflation, on March 15, the CRA once again set the prescribed rate at 1% for the second quarter of 2022, April 1 to June 30, the same as it had been in the previous quarter.
If you lent your spouse $100,000 on January 1 of this year and he invests it, at the end of 2022, he would owe you $1,000 in loan interest, but whatever interest or dividends made on that $100,000 would be taxed in his hands. The interest on the loan would be income in your hands and a deductible investment expense in his hands.
Gifts to your minor children
Maybe you want to spread the tax liability to your children as well since they can also qualify for the basic personal amount. The federal amount for incomes below a specified threshold was $13,808 for the 2021 tax year and rises to $14,398 for 2022. This strategy was more common when the Registered Education Savings Plan (RESP) was not as good as it is now. Then, parents would open informal trust accounts for their children. Attribution rules for interest and dividend income apply in this situation as well. As the gifting parent, the taxes on such income would be yours. However, capital gains are taxable in the hands of your children. Furthermore, at the age of majority, the former minor now has full rights, without restriction, to assert ownership of the assets in the account as he or she sees fit. One might hope that your child would listen to your advice on such matters, but there is no obligation to do so.
Assuming you want to support your children’s post-secondary educational endeavours, the better way, at least initially, to split income is to contribute to an RESP. The money contributed to the plan is out of your hands, grows tax-free while in the account, also attracts grant money (Canada Education Savings Grant – CESG), and is taxed in your children’s hands when it is withdrawn while enrolled in a qualified post-secondary program. Note that the tax only applies to the growth and grant money, not to the original contributions, which can either be returned to you when withdrawn or go to the student.
Gifts to your adult children
Interestingly, once your child reaches the age of majority, and is therefore considered independent, you can provide gifts of cash for investment purposes that do not result in the income being attributed back to you.
However, note that I am referring to gifts of cash. Gifts in kind of capital property would result in a deemed disposition. Your gift would trigger a capital gain or loss.
Gifts to an arms-length entity
Many people who work in the literary or performing arts, for example, writers or musicians, do so independently. They do not have contracts with publishing houses or recording companies. Instead, they self-publish their books on Amazon or put out videos of their performances on YouTube. Those distribution methods do not necessarily provide them with an adequate income, so they may appeal to their readers or viewers to join Patreon and contribute something extra. You become a small-scale patron of the arts.
Other organizations may engage in activities that you consider positive for society but, because of the type of activities they engage in, cannot be registered as charities. While technically charities are non-profit organizations, unless they are also registered charities, they cannot issue tax receipts for your donations.
In neither case are there any limits to the amounts you can contribute, except for those imposed by the recipient, but a gift of capital property would again be considered a deemed disposition and potentially result in a capital gain or loss. Cash would probably be the better choice here.
Gifts to a charity
I have written about charitable giving before, here, here and here. The main point to note here is that giving money away to a registered charity will reduce your tax bill, but that giving appreciated securities from a non-registered taxable account will be even more efficient.
For example, let’s assume you had equity securities that you held in a non-registered taxable account. Your total cost was $10,000. At the time of your gift, they were worth $50,000, so there was a capital gain of $40,000. Let’s assume you are in a marginal 26% federal tax bracket. If you sold the securities and donated $50,000 you would get a total federal tax credit of $14,472 which is based on a 15% credit for the first $200 plus a 29% credit for the remaining $49,800. However, you would also have an additional tax bill of $5,200 based on the capital gains tax you would have to pay on the $40,000 gain.
If, on the other hand, you chose to donate the securities in-kind, tax is not payable on the capital gain, but you still get the same $14,472 tax credit.
While providing gifts to others is usually beneficial to the recipient, and when done for altruistic purposes can make one feel good about the act of giving, it would be a shame if your gift either got you in trouble with the CRA or cost you more than it needed to in the form of extra taxes.
*Song by the Red Hot Chili Peppers
Photo by ciboulette: https://www.pexels.com/photo/red-chili-peppers-173880/
This is the 141st blog post for Russ Writes, first published on 2022-03-28.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.