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With the cost of housing, many parents want to help their adult children buy their first home or upgrade to a larger one. But is it as easy as cutting a cheque?
There are two types of gift options for parents: cash and assets in-kind. Cash can come from bank accounts, withdrawals from registered accounts, debt proceeds or the sale of investments. Assets in-kind are commonly transfers of investments, such as mutual funds or stocks, from the taxable account of the gift giver to the recipient.
There are no gift taxes or limits on gifts under the Income Tax Act. However, the transaction used to fund a gift receives the same tax treatment as if it were done for any other reason. These tax implications would apply to the gift giver, as shown in Table 1; recipients aren’t taxed on the gifts they receive.
Table 1: How gift givers are taxed
|Type of gift||Tax treatment to gift giver|
|Cash from bank account, other cash investment, proceeds of debt or TFSA withdrawal||Not taxable 1|
|RRSP/RRIF withdrawal||Fully taxable income|
|Cash from sale of taxable investments or transfer of those investments in-kind, including real estate 2||50% of the capital gain is taxable|
1 If cash outside a TFSA is converted from a foreign currency, 50% of the capital gain on the currency exchange above $200 is taxable.
2 Assumes the principal residence exemption is not used. Land transfer and other taxes may apply. If selling the real estate rather than gifting, the property’s fair market value should be used to avoid possible double taxation.
Xavier and Destiny want to give their adult son Jordan $100,000 to purchase his first home. They have ample non-registered, TFSA and RRIF balances to fund the gift. Funding the gift by adding a mortgage to their residence with a 10-year amortization is another option they want to explore.
They are both recently retired and each has a marginal tax rate of 30%. The rate of return on their investments (non-registered, TFSA and RRIF) is 5%, and a 5-year fixed-rate mortgage rate is also 5%. They want to know how each gift option would impact their retirement plan.
If any parts of their investment portfolios aren’t needed for future retirement income, this may be a straightforward choice. They can simply fund the gift from the assets with the lowest immediate cost.
The TFSA withdrawal would be tax-free. However, depending on the unrealized gains or losses in the non-registered portfolio, they could fund some or all of the gift with these funds at a low tax cost and preserve the TFSA portfolio.
Withdrawing additional funds from the RRIF or using a mortgage to fund the gift may be the least attractive options. RRIF income is fully taxable, and taking on a mortgage may be an unnecessary long-term liability, especially if the couple is debt-averse.
The conversation with Xavier and Destiny gets more complicated if all of the investments are needed to fund retirement income. In this case, they’ll be losing future income. Using a 10-year time horizon (the same as the proposed mortgage amortization) and their 5% return, the amount of after-tax monthly income lost would be $1,061. Alternatively, funding the gift with a mortgage would result in a monthly payment of $1,058 for 10 years. As part of the planning, consider the following:
- RRIF: Increasing RRIF withdrawals may increase their marginal tax rate, which in turn increases the pre-tax amount needed to fund the gift. This can also reduce eligibility for income-tested benefits.
- Combining sources: It could make sense to use a combination of assets to fund the gift — for example, the required minimum RRIF withdrawal in combination with the TFSA and non-registered funds.
- Behavioural factors: Not all clients are open to using debt to fund a gift, even if interest rates are lower than their expected returns.
Regardless of the choice, the gift would result in lost future monthly income or a new monthly payment. To offset the lost income or new cost, Xavier and Destiny would have to cut expenses or increase their retirement income (e.g., with employment income). This could be a tough decision.
Curtis Davis, FCSI, CFP, TEP, is director for tax, retirement and estate planning services, retail markets at Manulife Investment Management