Can we give money to our children to help with a home purchase?
In meeting with clients a common question we hear is,” Can we give money to our children to help with a home purchase?”
With real estate prices today, the only way many young adults can afford to purchase a home is with help from the bank of Mom and Dad.
People often ask if there are tax issues or concerns with gifting, and often miss the other two main issues:
- Can you afford to give money to your children?
- Does the gift become part of matrimonial property?
Let’s Review the Issues:
Can you give money to your children?
• The simple answer is yes. As long as the child is over the age of 18, there are no ongoing tax consequences for the parents.
• There are some rules, called the attribution rules, you should be aware of depending on whom you are giving the money to and their age.
Can you afford to give money to your children?
• Before giving any money to your children, you will want to review your own retirement income plan to see if you still have enough capital remaining to provide the income you require.
• This is a calculation we have done several times with clients to determine if the gift has a detrimental affect to their own retirement plans.
Does the adult child pay tax when they receive the money as a gift?
• There is no gift tax in Canada. The adult child does not pay any tax on the money they receive.
Does the parent have to pay tax on the money they gift?
When gifting money to an adult child, the source of the funds could cause some taxes to be paid. Potential sources include:
• TFSA: There is no tax on any money coming out of a TFSA.
• RRSP/RRIF: Any money you take out of an RRSP or RRIF is considered income and is fully taxable.
• Non-Registered Investments: If you sell a non-registered investment, you may have capital gain if the market value is greater than the cost base of the investment.
Is the gift part of matrimonial property?
• If something is considered matrimonial property, it means it is owned by both spouses and will get divided between the spouses if they get divorced.
• Normally inheritances or gifts received prior to and during the marriage are excluded from matrimonial property – however, if the money is used for a matrimonial home, it is not excluded.
• Loan the funds to your child
If you wish to exclude the gift from communal property, and a potential split in the future in the event of divorce, you could loan the money to your child. You would have to have an actual loan document created that outlines the amount and the repayment schedule among other items. You will want to review this with your lawyer.
• Create a marriage contract
Have your child enter into a marriage contract (often referred to as a pre-nup) that specifies what happens to the house and any other gifts and assets in the event of a separation or divorce. Again, you will have to review with your lawyer.
The amount of money gifted also has to be considered. There is a difference in the consequences of gifting $100,000 vs $5,000.
Gifting can be complicated, and you will want to review with your accountant, lawyer, and CFP® professional before you make a decision.
Excerpts from the Book -
Preserving Wealth - written by Jack Lumsden, MBA, CFP®
“I hope your sons don’t follow in your footsteps when it comes to divorce,” Alice remarked, “but I see what you mean, and it’s close to home. So, Uncle Wayne, what kind of legal rights do Sandra and I have to the money that David and Jack inherited?”
“Well,” he answered, “an inheritance or gift given to one spouse by a third party is not considered to be part of his or her family property if received after the date of the marriage, so the other spouse has no claim to it as part of a divorce settlement. The same thing goes for proceeds from life insurance. However, the re-investment income earned from an inheritance, through investments and the like, is considered to be family property, unless the instructions in the will specifically prohibit this.”
“Let me see if I get this,” said David. “An inheritance or gift, if received after the marriage, is not part of the matrimonial property, but the income earned on the capital over time is. And the only way to get around it would be for someone like Dad to have specified in his will that the income earned from the inheritance is not to become family property, and this is normally a standard clause in professional wills.”
“That pretty well sums it up,” said Uncle Wayne.
“And also,” continued Alice, “when Mark gets around to changing his will, he should insert a clause stating that any income earned on the inheritance he leaves to each of his sons is for their use only.”
“I guess we should all put that kind of condition in our wills,” I added. “But what happens in a case like mine and Sandra’s, where we’ve used the inheritance for our mutual benefit? As you know, we’ve paid off our mortgage and have topped up our RRSPs. How does the inheritance stay separate under those circumstances?”
“Let me try to answer that,” said Sally. “I had a call from my lawyer friend this week. He said that once you’ve started using the money for the benefit of both partners, such as paying off the mortgage or purchasing a matrimonial home, then it’s pretty much considered family property, and the value of the joint benefit would be split 50/50 in a divorce. If the spouse who originally inherited the money wants to prevent this, they could have a marriage contract signed, and/or he or she could try to keep the inheritance in his or her own name and segregated from any other assets, especially assets owned jointly.”
For more information you can refer to Preserving Wealth: The Next Generation - The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®
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Jack Lumsden, MBA, CFP® Financial Advisor, Assante Financial Management Ltd.
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
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