Gordon Wusyk says his client’s gift was made with the best intentions. The mother was in failing health. She had more than enough to live on, and wanted to recognize the ongoing care given by her youngest daughter. So, unbeknown to the rest of the family, she transferred the family cottage to her daughter.
Fast-forward 15 years and the mother’s generosity has caused unintended financial and familial consequences. While her estate has dwindled, Wusyk, president of Predictable Futures in Edmonton, estimates the cottage is now worth eight to 10 times what it was when the gift was made. Yet no tax has ever been paid. Wusyk estimates penalties on those unpaid taxes are in the thousands. Even more troubling is the resentment and bitterness the gift created. The inequity has left other siblings feeling cheated and overlooked. The youngest daughter feels guilty and is sure her mother would want to make amends. But in the intervening years, the mother has lost capacity to change her will or do any new estate planning. Wusyk expects a long period of family animosity, perhaps culminating in a legal challenge of the mother’s will when she eventually passes.
Think before you give
Unfortunately, Wusyk sees this “gift first, ask questions later” approach too often.
“There’s going to be disharmony.”
He adds, “There’s going to be huge tax—all kinds of problems, all kinds of unintended results, because no one sat down to actually review the overall goals and aspirations or what the original intentions were.”
Instead of clients giving away assets willy-nilly before they die, they should review both the tax and family implications of making a gift. Wusyk adds that planning could have saved the mother’s estate thousands in unpaid taxes and penalties.
Rather than gifting the cottage to a caregiver, Wusyk says the mother could have declared it her principal residence, thereby eliminating any taxes owing on capital gains. Upon death, the mother could have distributed proceeds from the sale of the cottage as she saw fit, thereby preventing family acrimony and bitterness.
He suggests the agenda for family estate planning meetings should include topics such as:
- Family values – the principles and ideas that have informed parents’ decisions to leave what to whom;
- Unequal bequests – whether parents intend to leave more to one child or another, and why;
- The family business – who’s going to be active in the business if there is one, and who’s not; who will have an ownership stake, and who will not;
- Philanthropy – which causes and charities the parents will support (if any) with their estate; and
- Personal effects – mementos and keepsakes that could have immense meaning for one child or another, or could cause acrimony in the future.
“Mom and Dad should be able to tell children what they’re doing and why they’re doing it, and that way there’s clarification,” Wusyk says. “It just helps the kids understand the mindset or the rationale.”
Plenty of reasons to give . . .
Regardless, early giving can be an attractive estate planning strategy.
Since assets given away prior to death aren’t technically part of an estate, they aren’t subject to probate.
Another reason to give early is to save tax—not now, but years down the road. While there are technically no limits to the amount a Canadian citizen can give in a year, when an owner gives, she’s deemed to have disposed of the assets at fair market value. That means any capital gains taxes must be paid.
Wusyk says with a family cottage or other assets that will eventually be passed to the next generation, an early tax payment could be a good thing.
“If you’re relatively young parents, and the property is going to be in the family for twenty or thirty years more, to give it at a very low value may be a good idea,” Wusyk says. “If you don’t, then when the children do get it they’re going to pay a larger amount of tax.”
Wusyk admits it’s not an easy decision. “You have to decide: do you want to trigger a little tax now, or a very large amount later?” he asks. “Or, do you want to keep it in your hands now and then gift it at death, and use an insurance policy to pay off the tax?”
He adds many families opt for the latter, purchasing a joint last-to-die policy payable to the estate. Even late in life, Wusyk says such policies are extremely cost-effective, and can go a long way toward helping heirs retain assets they’d otherwise have to sell to cover taxes.
If a client is a business owner, the same idea can be applied to privately held corporation shares. Should parents hang on to ownership shares and defer tax as long as possible? Or should they freeze those ownership shares at their current value, then make a gift of newly issued shares, thereby passing future growth to the next generation? Both can be viable strategies. If, for example, the family’s goal is to pass on growing assets within the family (e.g., an operating business, the family farm or a real estate portfolio), a freeze can give parents an opportunity to park ownership until succession decisions are finalized. “It gives you a chance to test drive the kids in terms of their ability to run things,” Wusyk says. “It gives you lots of flexibility at the same time as it keeps the tax man at bay.”
. . . and plenty of reasons not to
While she acknowledges the advantages of early giving, Michelle Isaak, associate with Davis LLP in Vancouver, says “it’s not something we generally recommend.”
In Isaak’s experience, many people “make a decision at a certain point in time, with certain assumptions. Those may not be accurate at a later date,” she says. Giving away too much too early could leave parents with little room to manoeuvre if their retirement projections don’t go as planned.
“People come in and think, ‘Oh, property prices are rising so I’ll have lots of equity in my home. I’m going to be fine.’ And then those things change. Property prices may fall. Clients’ RRSP or investment portfolios may decline in value.”
Increasing life expectancies also play a role when deciding whether or not to gift early. For instance, Isaak says if clients go to a nicer seniors’ residence, they’re “going to burn through money awfully quickly.” He views taxes as another drawback of early giving. “The average person wants to defer their taxes until death—the idea that paying later is better for you now,” she says. “All of a sudden, in one year, you may have a large tax bill. So that has to be part of planning.”
If the gift is the family cottage, a vacation property or other real estate, there’s also property transfer tax to consider. While the exact figures vary according to the province, such tax can be considerable: on a $500,000 Muskoka, Ont. cottage, for example, the transfer tax is about $6,500, while a similarly priced condo in Whistler, B.C. would generate a bill of about $8,000 (see “Number crunching,” below).
Read: Don’t delay planning
“That would have to be paid by the child. But chances are the child’s not going to want to pay that, so it’s going to probably come out of Mom and Dad’s pot,” Isaak says.
If the child inherits the property instead, she would still have to pay property transfer tax. But, additional funds could be put aside in the meantime or bequeathed in the will. Such a move would also generate probate fees of $7,000 in Ontario, or $6,650 in B.C.
Financial issues aside, Isaak says the idea of early giving makes many of her clients uncomfortable.
“They really want their kids to make it on their own,” she says. “They’ll help a bit on the way, but they want them to learn what it’s like to start from scratch.”
These parents are also concerned about how early giving might change relationships within the family, she adds. “If kids have an expectation, your relations might be a little bit different,” she says. If Mom and Dad give the bulk of their estate away relatively early, there may be less incentive for the kids to provide care when the parents become frail and infirm. “It’s unseemly to talk about, but it’s part of human nature,” Isaak admits.
If, after running through the drawbacks, a client still wants to give away assets, Isaak strongly recommends getting things in writing.
“Document that gift. Sign something, like a deed of gift that confirms you are gifting this,” she says. “You don’t want any arguments in the future that ‘Dad didn’t really want to give that to you; he just put your name on it for convenience, therefore it should be brought back into the estate.’ ”
This can be a particular problem with jointly held assets, such as chequing accounts or principal residences. Because the law generally assumes accounts held jointly with adult children are held in “resulting trust” (meaning the beneficial interest is presumed to be retained by the parent), other siblings may dispute the gift. Documenting the giver’s intentions solves this problem definitively.
Giving assets now, rather than later, can make a lot of financial sense, particularly if the assets in question are expected to appreciate, and will be held by heirs for a long time.
This example shows the tax bill on a recreation property in Ontario purchased for $50,000, given to children now, and in 20 years via a will. To keep the math simple, we’ll assume tax rates remain the same, and there are no other improvements to the property. We’ll also assume the owner and estate will be subject to the highest tax bracket.
|Pay Now||Pay Later|
|Tax payable:||$34,800 (Paid by children)||$127,600 (Paid by estate)|
Property transfer tax
Every province in Canada (including territories, and some cities too) taxes the value of the property being bought, sold or otherwise conveyed. The fees vary considerably. The chart provides an example of the transfer tax owing on properties of various values.
|* includes municipal and provincial property transfer taxes|
|City of Toronto*||$3,450||$5,700||$8,200|
|Nova Scotia (Halifax)||$3,000||$4,500||$6,000|
|Prince Edward Island||$2,000||$3,000||$4,000|