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Give while you live: Providing your heirs with their inheritance before you die is increasingly popular

Traditionally wealth is passed down to new generations after a parent and his or her spouse passes away. But a new trend of intergenerational giving while still alive is emerging and it makes way more sense than going to your grave with money still in your bank.

Canada has no gift tax on cash

Cash given to your children or grandchildren won’t be taxed. That’s why many families choose to “gift” money to their heirs in the present, rather than leaving it in a will. Not only does it shrink the tax liability that an estate could potentially face, it’s also joyful to see that money put to great use by younger family members who could use a helping hand.

Other styles of gifts are taxable

Taxable gifts include real estate and farms, investments, and RRSPs. The tax implications vary between these.

If you’ve been thinking of passing the family cottage down to your children, more often than not it makes sense to sell the property while you are alive and give the money instead. Or you can simply give the cottage to your children. In either case, you will pay a capital-gains tax on the amount the property has increased in value since you bought it, but the amount will likely be less than your children would have to pay further down the line.

Capital gains work like this: If the market value is higher than what the property was purchased for, the difference is called a capital gain, and taxes must be paid on 50 per cent of that difference. Note that tax rates change and you’ll want to keep up to speed using the Canada Revenue Agency website.

Be strategic about when you gift and for what

A few years before I went away to university, my grandmother gave each of her grandchildren money to be used for education. Paired with scholarships and my own savings from part-time jobs and paid internships, I was able to pay for the majority of my undergraduate degree. That initial investment that my grandmother made in my education has had an exceptionally high rate of return for me financially, professionally and personally.

Consider focusing on the highest impact gifts at the right time. Three suggestions are: RESPs for education (this money will be amplified by the Canadian Education Savings Grant), a sizable down payment of more than 20 per cent (this helps your kids avoid hefty mortgage insurance fees), or an income top-up when your children take parental leave to rear their children (this prevents unnecessary debt that many young families accumulate because of a drastically reduced income).

Gifting for enriching experiences, such as travel, is another popular approach, but has limited financial benefits. And investing in an heir’s business needs to be carefully evaluated to ensure the business has a strong plan, and isn’t doomed to fail.

Pair your strategy with proper planning

Gifting an inheritance in life requires proper financial planning. The tax rules around gifting assets are complicated, so make sure you talk to an experienced estate planner. You want to ensure the sum doesn’t compromise your financial security in retirement. In the same conversation, ask about the specific tax consequences with various types of gifts so that there are no surprises.

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