Life can be expensive, and it’s only natural to want to help your children financially. If you are able to share personal wealth with your adult kids, what’s the best way to do it, gifting or loaning?
Gifting
There are currently no limits on the amount of cash you may gift to adult children. There are a few other things to consider:
Loss of control
- Do you have strings attached to this gift?
- What if your child spends it differently than you had hoped?
- Will it discourage good financial stewardship?
You could always outline your intended use for the gift but once gifted, it’s literally out of your hands. You could start with a small gift before determining if a larger gift is in the best interest of your child.
May become part of marital assets
If your adult child is married or in a common-law relationship and uses the funds to purchase a joint asset such as a home or property or integrates the funds in joint accounts with their partner, these funds will generally be considered matrimonial property. If there is a breakdown in the relationship, marital property is divided equally between the divorcing spouses.
Funds subject to creditors
If your adult child falls into financial trouble, the gifted assets are fair game for creditor claims. You may wish to reconsider gifting funds to your child directly if this is the case and instead look at loaning the funds or setting up a discretionary trust.
Estate planning
Questions to ask:
- Is this gift an advance on an inheritance already earmarked for your adult child, or an outright gift?
- Does this create unintended inequality in your estate?
Ambiguity in this area can cause conflict for other adult children or beneficiaries of your estate. Having clear communication and legal documentation is key to minimize arguments over fairness and estate equalization.
Loans
Loans
Do I charge interest? In most situations, you may provide the loan to adult children interest-free with no tax consequences. If interest is charged, interest income is taxable to you.
CRA and taxes
If the CRA determines that primary purpose of the loan is to shift investment income into your child’s lower tax bracket to avoid tax, some attribution rules could apply – meaning the tax owing would come back to you. If your child does intend to invest the loaned funds, charging them interest at the prescribed rate (currently 5% as of October 2023) is one way to avoid the attribution rules. And if using loaned money to invest, the child can claim the interest as a deduction on their taxes.
A loan to help purchase a house
Is the loan to help your adult child purchase a home? If they are also securing mortgage or loan through a bank or other lender, loaning funds to your child may reduce the amount they are able to borrow from another institution.
Protection again creditors and marriage breakdown
If cash is gifted, it can easily leave the hands of the intended beneficiary in financial hardship or the ending of a marriage or common-law relationship. By documenting and registering a loan you can call the loan and claim the money back to yourself in those situations.
Loan forgiveness
You may choose to forgive the loan, either while you’re still living or at your death. However, while the loan is active, be aware of the limitation period in your province so that the loan remains legally enforceable should you need to call on it.
Key Takeaways
Consider your own financial plan
Don’t forget about your own financial goals and wellbeing.
- How will you access these funds to help your adult child?
- How much is the right amount?
Make it official
Whether a gift or loan, proceeding with no documentation can lead to arguments later, particularly at your death when assets are being divided.
Seek advice
Make sure to connect with your financial planner to talk through how helping your adult child fits into your overall financial world. Whether you choose to gift or loan the cash, it may also be prudent to consult with an accountant or lawyer. Don’t feel the need navigate it alone – your Connect Wealth advisor is here to help!
Written By Julia Friesen, Financial Advisor
Julia’s background in the actuarial field gives her unique technical experience in pensions, group benefits, and investments that she is excited to bring to Connect Wealth clients. She holds a BSc in Physics, and a CFP® designation.
In her free time she enjoys travelling, connecting with friends, and playing and writing music. She lives in Abbotsford with her husband and three kids.
