Know the rules before giving cash

A gift of cash to your children or grandchildren can serve many purposes, such as help with a house purchase, a contribution to an RRSP or assistance with paying education costs. Along with the satisfaction of seeing the money used when it’s needed most, cash gifts while you’re still alive can also help reduce your own tax bill and estate costs.

But no matter what your motives, don’t trip over the income attribution rules or give away too much too soon. Here are some things to keep in mind before deciding how to help your offspring.

Different rules for minors
If you give your adult child or adult grandchild cash, the attribution rules do not apply and you may even be able to reduce your future income taxes. You are not responsible for the taxes on any future income earned on the cash; your adult child or grandchild is.

However, under current attribution rules, if you give cash to a child or grandchild under 18, you’re responsible for the taxes on any interest and dividends earned until the recipient turns 18. In other words, you’d be taxed just as if you’d made the investment and earned this incomeourself. But if the cash gift generated capital gains only, these gains could be taxed in the hands of the child.

To get around these rules, some people set up informal trust accounts to manage funds on behalf of children or grandchildren under 18. An informal trust may be established by designation on an account form rather than by a legal document. Another option for paying education costs is a registered education savings plans (RESP).

Rather than setting up the RESP yourself – otherwise known as being the plan’s subscriber – consider giving the money to the parent who, in turn, will set up the RESP. That way, if your grandchild does not go on to higher learning, the subscriber-parent may transfer up to $50,000 to his or her own RRSP (provided he or she has sufficient unused RRSP contribution room). This strategy makes sense given the fact your child is likely to have an RRSP longer than you will.

Another option for helping your adult child with the down payment for a first home, especially if you’re concerned about the stability of his or her spousal or common-law relationship, or you’re not ready to part completely with the capital or the interest, is to extend a loan and secure it by taking back a mortgage on the house. Or you could request a personal promissory note to formalize the terms of the loan. In both cases, remember that any interest paid to you is taxable.

While some people make outright gifts of cash to their children, others look at such a gift as an advance on an inheritance. For example, suppose you have two children and you give one child $50,000 while you’re still alive. If the $50,000 were considered an advance on his inheritance and documented as such in your will, it would be considered in the final settlement of your estate; this could help ensure that both children are treated equally when it comes to the distribution of your assets.

Check your tax position
Finally, once you’ve determined you can indeed afford – and want – to give away some of your cash assets while you’re alive, make sure that coming up with the actual cash doesn’t increase your tax bill inadvertently. For example, if you must withdraw money from your RRSP or RRIF, or sell investments at a profit, check that the additional income doesn’t push you over the threshold for clawback of OAS benefits. While seeing the recipient benefiting from your gift can be wonderful, the less obvious consequences may not be as rewarding.

Attribution rules for gifts to children and grandchildren
Recipient Income earned Person reponsible for tax on income
Child/grandchild under 18 Interest You
Dividend You
Capital gains Child/grandchild
Adult child/grandchild Interest Child/grandchild
Dividend Child/grandchild
Capital gains Child/grandchild

Sandra Foster is the best-selling author of three books, including You Can’t Take It With You: The Common-Sense Guide to Estate Planning (fourth edition, John Wiley, 2002).