Photo by Marcus Aurelius from Pexels
We humans are wired for generosity: we feel joy and satisfaction when we give to others. What may not be as natural is to consider the potential impacts—positive and negative—before giving a financial gift to family members or making donations to charities. Here’s an overview.
When you give cash to a family member, there are generally no immediate tax issues to consider—unless you are a U.S. citizen. U.S. citizens may be subject to U.S. gift tax if they give more than US$15,000 annually to anyone other than a spouse. Gifts by a U.S. citizen to their spouse who is a non-U.S. citizen have an annual exemption of US$159,000.
If you gift cash to a minor child or grandchild and the funds are subsequently invested, the resulting income—including interest and dividends—are attributed or taxed back to you. Capital gains, however, are not subject to the attribution rules and are taxable, when realized, to the child or grandchild whom you gifted. If you gift cash to a child or grandchild who is 18 or older, there is no attribution.
A gift to a spouse will result in attribution of both income and capital gains. Attribution can be avoided by establishing a family trust and making a loan at the Canada Revenue Agency’s prescribed rate (currently 1%), but this can be costly and complex, so may require a significant outlay. A spousal loan can also be made at the prescribed rate to have subsequent income taxed to the recipient spouse; that’s a simpler way to make a gift and split income with a lower income spouse.
If you gift a capital asset, such as investments, a cottage or a rental property to a family member other than a spouse, that asset is subject to a deemed disposition (just as if you sold it). The gift takes place at the fair market value of the property, with any capital gain taxable to you. You cannot get fancy with real estate and try to avoid this by having the gift take place at an artificially low value, either.
Although assets gifted to a spouse can occur at the adjusted cost base and not the fair market value, the subsequent income and capital gains are subject to attribution.
In some cases, a loan may be better than a gift. It may give you the confidence to part with a larger amount, knowing there is the protection of being able to request repayment of the loan. For family law purposes, a loan may help ensure a gift is not split with a divorcing son- or daughter-in-law; it is repayable by your child and their spouse in the event of a relationship breakdown.
Loans can also be prudent when you have multiple children and have given more to one child than to another and want to ensure equality in future. The larger amount, if offered as a loan, can be owed to your estate on your death to maintain an equal division of your assets among all of your children, if that is your intention.
Gifts of investments instead of cash can be advantageous, as non-registered investments that have appreciated in value can be transferred in kind to a charity. The charity will issue a donation receipt for the fair market value just as if you had given cash, but the capital gain on the deemed disposition is not taxable.
When spouses both make donations to charity, they should combine their donations when completing their tax returns, and here’s why: The first $200 of donations claimed by a taxpayer results in a lower tax refund than donations in excess of this amount—and donations can be claimed by either spouse. So, having one spouse claim donations will typically result in a bigger family tax refund.
It’s important to know that giving to causes that are important to you may not necessarily result in tax savings. If you give to a fundraising campaign through a crowdfunding platform (such as Kickstarter), this typically will not be considered an eligible charitable donation for tax purposes. An eligible donation must be made to a qualified donee, including:
Giving to family and philanthropic causes can be rewarding. Giving your time and in other ways may be more important than giving money, but those who can afford to do so should consider some of the above issues before they make a gift.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.