In last weekend’s edition of the Globe & Mail,the great columnist, John Heinzl, wrote an answer to a question concerning capital gains. The reader inquired of Mr. Heinzl whether he and his wife should cash in some investments that had increased significantly in value. Doing that would create capital gains, though if the reader and his wife waited until they passed away, there would be capital gains as well. So the question was whether they should cash in and pay the tax now, or wait.
Truth be told, this kind of question can be much wider and should be considered by any person or couple who wish to cash in and gift assets. There can be several reasons to do this, such as to reduce the size of the couple’s (or person’s) Estate, or perhaps to reduce the likelihood of a challenge to the deceased person’s Will by surviving family members (because the Estate might not be large enough to merit the cost of litigation).
There is no one answer to the question. Whether it makes sense to start cashing in and/or giving away depends on numerous factors, including the person’s marital situation, family situation, income and asset mix. However, because of the expense of administering a large Estate, this question is worth exploring.
For a long married couple, with children, early gifting of assets can make sense. Their children may be able to make good use of the gift and, if the parents are satisfied that they are still adequately financially secure, it can be a good idea.
If, however, a couple are in a second marriage situation, there are some important issues to consider. First, perhaps, is whether the couple each have children and whether there may be friction (based on the expectations they have with respect to inheritance). So, for example, a spouse with a good income, and a large asset base, may want to gift assets to her or his children before entering the new relationship.
Meanwhile, for a Widow or Widower, the gifting of assets to children may well make sense, depending what assets the Widow or Widower would be left with after the gifts are made. The need for assets may be less critical for the surviving Mother or Father.
The cashing in and/or gifting of assets by a person will give rise to capital gains, where the assets being cashed in or gifted include an investment portfolio (such as stock). Cashing in or withdrawing funds from an RRSP or RRIF, meanwhile, will be fully added to income. That becomes relevant where part of the person’s income is their OAS. Certainly, extra income might bring the person into a higher tax bracket, so that more tax is payable in any event, but the higher level of income may reduce their OAS benefit. At an annual income of about $71,000 the clawback aspect of the OAS is activated. The OAS benefit the person receives will be reduced. At an income of $120,000 (round numbers) the OAS is eliminated. So the cashing in and gifting, here, come at a high cost.
Still another aspect of gifting, in general, is that we obviously have no idea what will be the value of the person’s asset base at death. Despite an increase in value of many persons’ assets in 2021, if they cash in and gift away, then they live another 11 years, it is unpredictable what those assets may have been worth in 2032. If the assets drop in value over the 11 years, the cashing in and gifting may have been a poor decision.
Without a doubt, one question that must be answered in the consideration whether to gift, is whether the effect on the person’s income is financially harmful.
In Canada, different assets attract a different tax treatment. Cashing in an RRSP or an RRIF adds the full amount withdrawn to the person’s income. Cashing in a stock portfolio will give rise to a capital gain, and half of that gain is added to the person’s taxable income. Selling a person’s home does not (right now) attract tax, if it is the person’s principal residence. Selling a rental property or recreational property will give rise to a capital gain (especially if the property is located in the lower mainland).
One question, therefore, in the consideration whether to give away while alive, is which asset(s) to give. If you did not know this before, you know now why Accountants are important people!
There are practical reasons to gift assets while you are alive. The question to ask is whether any of those reasons applies to your own situation. Assets may still be rising in value, so you may want to wait. You may not want to reduce your own income. Children (or new spouses) may need the money but they may not be good money managers. If a child is going through a matrimonial breakup, it may not be the time to gift assets to them. Ultimately, there are no two persons, or couples, exactly alike. So whether to gift at all, has to be thought through at length, with advice. It may or may not be right for you.