Family Tax Planning Series – Part III: Adults

For the final part of our series, we are going to discuss the planning that can be done with your adult children to help minimize your taxes.

Gifting to your child:

There is no tax on gifts in Canada to the recipient. But the taxpayer who provides the gift is subject to a deemed disposition of the asset. This does not cause an issue when an asset like Canadian cash is gifted since its value will be the same as its cost base. But it can lead to potential tax implications if real estate or investments are gifted. There also may be attribution of income on certain investments back to the gift giver.

To keep things simple, we will only look at gifts of cash to your adult children.

Most parents are open to the concept of providing cash to their children if they can be comfortable that it will be well spent, or used for a purpose that the parents think is appropriate. However, once a gift is made it is no longer the parent’s asset to control and it can be used for any purpose by the child.

Instead consider these options if you are planning to gift cash to your adult children to help ensure they have a tangible, long-term benefit from the gift:

Gift to fund a Tax-free savings account (“TFSA”) contribution:

The TFSA is the first investment account many young people will open. The annual limit for contributions is quite low (currently $6,500 per year) but can provide a useful lesson in investing when the parents insist that their cash gift be used to fund a contribution. Setting the pattern of savings early and helping your child to understand the TFSA should be used to save for larger purchases or retirement is a great way to help them get them set up for financial success.

Gift to fund a First Time Home Savings Account (“FHSA”) contribution:

A common concern for parents is how to help their children buy their first homes when the cost of real estate is far beyond the income of their children. By gifting your child funds to contribute to a FHSA at the current $8,000 a year limit once they turn 18, you not only will give your child a tax deduction that they can use against their income but allow them to build up funds in the account which can be withdrawn in the future for a home purchase.

Gift to fund a Registered Retirement Savings Plan (“RRSP”) contribution:

Finally, consider gifting (but not lending, unless you are planning to charge the prescribed CRA rate of interest) funds to allow your child to contribute to their RRSP. If you lend them funds to do this not at the prescribed rate, the tax on their future withdraws may attribute back to you.

Gifting them the funds will allow for them to build up savings for their retirement or for a first time home purchase using the Home Buyer’s Plan program to draw funds built up in their RRSP to build or buy a qualifying home.

They will also receive a deduction for any contribution, which does not need to be claimed immediately if they are lower income. It can instead be claimed in future, high income years.

Inclusion of your child in the family business:

Finally, most business owners hope to one day pass down the company they have spent their lifetime building to members of their family. If your adult child is interested in joining your family business it is worth taking a look at how to include them tax-effectively not only so that they can be entitled to income from the business, but also so that you as the original owner can fund your retirement.

There are several ways to achieve a business transition in a tax efficient manner. You may consider using an Estate freeze involving a Trust (as described in our previous article here) especially if you have multiple children who you may wish to include, but are not sure which ones will be interested in the future.

Alternatively, you may wish to use your Lifetime Capital Gains Exemption (“LCGE”) by selling the shares to your adult child.

Until recently, it was tax prohibitive to sell your business to a family member as opposed to an arm’s length person. The conditions for you to be able to do so are strict and can be difficult to meet without proper planning in the years prior to the sale but is achievable.

Give the VR office a call if you are thinking about transitioning your business to the next generation, and we can walk you through the conditions and planning required!

If you have not read the first two parts of our family tax planning series, make sure to check them out under our Articles page. Where you will find find FAQ’s, prize packages and everything tax related!

The above material is current as of March 4, 2024.

The information presented is a general overview and not intended to cover specific situations. You should consult with your professional advisors directly before taking any action.

Vertefeuille Rempel Chartered Professional Accountants LLP, its partners, employees and agents do not accept or assume any liability by anyone relying on the information presented.