The article “How to minimize tax and maximize impact when passing your savings to the next generation” was originally published in Financial Post on August 30, 2021. PHOTO BY CHLOE CUSHMAN/NATIONAL POST ILLUSTRATION FILES.

Jason Heath: If you have more money than you’ll need in retirement, consider putting these strategies to use

A point may come for some retirees when they realize their savings are likely to outlive them. There are strategies for gifting money during one’s life that can help minimize tax and maximize impact depending on when and how a retiree wants to distribute their wealth.

The giving of gifts is generally not a taxable event in Canada. One exception is when an asset that has risen in value is gifted, as this may result in a capital gain on a deemed disposition. This would apply in the case of an asset like a cottage that has appreciated and is gifted to a child. The giftor cannot use an artificially low value to avoid capital gains tax either. The disposition is based on the fair market value.

U.S. citizens in Canada may be subject to U.S. gift tax on gifts that exceed US$15,000 per year. A gift to a non-U.S. citizen spouse may be up to US$159,000 without incurring gift tax.

Some parents give their children money to help buy a home. A mortgage lender may require a gift letter to be signed to acknowledge that the child is not under an obligation to make repayments to a parent. This helps ensure the child is under less financial strain to make their mortgage payments.

Sometimes, a loan to a child instead of a gift, whether for a home down payment or other purpose, can be beneficial. It may allow a parent to call the loan if they need the funds in the future and provide more comfort before making a gift. From a family law perspective, a gift may be more at risk of being divided in the event a child divorces, whereas a properly documented loan may keep that money in the family because it is a debt at the time of a relationship breakdown.

A high-income retiree may be paying up to 62 per cent tax on their last dollar of income if they are subject to Old Age Security clawback. If they have investments that can be given directly or indirectly to a lower income family member, this can allow for family tax savings.

A parent can give a child money directly to contribute to their RRSP or TFSA. This can generate tax refunds, tax deferral and tax savings for a family beyond a parent’s own RRSP and TFSA limits.

A discretionary family trust can be an indirect way to split income with children and grandchildren. Investment income earned by a trust and paid to or used to pay expenses for lower-income family members can be taxed to them, potentially with little to no tax payable, while a parent maintains control.

Insurance is an important risk management tool. Someone who has a family who depends on their income should consider life insurance. Even those without dependents should consider disability and critical illness insurance to protect their income or to provide funds in the event of a critical illness. Buying insurance may not be high on a child’s priority list with funds gifted to them, so a parent can consider offering to pay for insurance for a child to ensure they are protected.

Retirees who are philanthropic should consider how best to make their donations. Donating assets like stocks, mutual funds, or ETFs can be better than using cash. This is because the capital gain on a security that is donated to a charity is not subject to tax. The donation receipt is issued for the market value of the investments and the same tax savings is available as giving cash, but capital gains tax can be avoided.

Those who want to establish a charitable legacy can consider a private foundation or a variation called a donor advised fund. A private foundation may require significant funding and has costs and complexity. A donor advised fund may be established with an initial donation of $10,000 or less. Both allow a philanthropist to select a name, allocate annual grants to charities, and name successors to oversee ongoing donations.

Someone who owns corporate assets can implement an estate freeze so that some or all of the future growth of their assets will be taxable to their children instead of to them. Effectively, the value of one’s estate can be frozen to minimize tax payable on death, when a taxpayer is deemed to have sold all of their assets, which triggers tax.

Life insurance can be an effective tool to increase the after-tax withdrawal of corporate savings by beneficiaries upon a shareholder’s death. A life insurance death benefit may be eligible to pay out partially or fully tax-free from a corporation, whereas a withdrawal of cash or other corporate assets may be subject to up to 49 per cent tax without adequate planning.

A parent who owns shares of a qualified small business corporation or a farm or fishing property may be able to multiply their tax-free lifetime capital gains exemption. The small business exemption is nearly $900,000, and for farm and fishing properties, it is $1 million. By giving ownership directly or indirectly by way of a trust to their children or grandchildren, other generations of a family can benefit from a large tax-free sale or disposition of a qualifying corporation or property.

There are tax and logistical factors to consider in order to maximize the act of giving. Those fortunate enough to have more financial wealth than they need to sustain their own retirement can choose to give some away to family or to charity during their lives so they can witness the resulting impact firsthand.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.