Intergenerational wealth transfers: Part 1

Serious caucasian old elderly senior couple grandparents family counting funds on calculator, doing paperwork, savings, paying domestic bills, mortgage loan, pension at home using laptop. — iStock / Inside Creative House

As baby boomers transition to retirement, many are thinking about their retirement and estate plans, and options to transfer wealth across generations. This great wealth transfer will see approximately $1 trillion passed to gen Xers and millennials by 2026 — the largest intergenerational wealth transfer in Canada’s history.

The current economic climate has also inspired “gifting while living,” as many gen Xers and millennials struggle to make ends meet given high inflation and soaring borrowing costs.

This two-part series of articles focuses on intergenerational wealth transfers, with considerations for both gifting while living and transfers at death. It also considers attribution tax rules that can play a role in certain gifting strategies.

Attribution rules

When thinking about in-family gifts, consideration should be given to attribution rules designed to prevent certain income-splitting transactions. The Income Tax Act (ITA) has a number of attribution rules aimed at individuals, corporations and trusts. For the purpose of this article, we will focus on transfers involving individuals and trusts and how the rules might impact certain gifting arrangements.

When assets are gifted to a related minor (e.g., child, grandchild, niece or nephew), future income from the gift is generally taxed in the hands of the gifting parent or grandparent until the year the child or grandchild reaches age 18. Capital gains earned post-transfer are normally taxed to the child or grandchild regardless of age. Subject to certain exceptions, these rules also apply to gifts via a trust. The table below details the rules for both gifts and low or no interest loans to children and grandchildren (including nieces and nephews).

The attribution rules cease at death, so are generally a concern only for certain gifts and loans while living.

Summary of attribution rules for gifts and loans

	Gift	Low or no interest loan
Post-transfer income recipient
Child under 18	Attributed to giftor	Attributed to lender
Related adult	No attribution	Attributed to lender
Post-transfer capital gains recipient
Child under 18	No attribution	No attribution
Related adult	No attribution	No attribution
Additional rule for trusts	When settlor continues to control the trust or is a beneficiary, income and capital gains are taxed to the settlor

Gifts while living versus at death

As previously noted, the current economic climate has caused many parents and grandparents to lean toward gifting while living instead of (or in addition to) gifts at death. While no one solution fits for all families, pros and cons of each option can help determine the best fit.

Gifts while living
Pros	Cons
–Can witness family enjoyment of gift –Questions about intentions can be clarified, reducing potential for conflict –Potential for income splitting and the preservation of income-sensitive benefits –Access to certain markets (e.g., housing) and help with cost of living –Estate planning is simplified, with the potential to reduce delays and estate administration fees	–Giftor may require assets to fund future needs, including health care –Gifts of appreciated assets can accelerate taxes for giftor –Can add complexity, particularly when pre-death gifts are to be addressed as part of an estate settlement –Potential loss of control for giftor and exposure to children’s creditors
Gifts at death
Pros	Cons
–Availability of assets if needed in retirement –May simplify distribution plan when all assets are distributed from an estate via a will –Potential tax deferral when gift does not occur until death –As circumstances change, gifting plans can be adjusted	–Does not address cost of living for children/grandchildren –Questions about intentions not easily clarified –Income-sensitive benefits in retirement may be compromised –Potential for higher income taxes and estate administration fees at death

Circumstances and family dynamics often drive decisions about wealth transfer strategies for a family. Part 2 of this series will discuss common strategies while living and at death, including how knowledge transfers can play a role.

Wilmot George

Tax & Estate

Wilmot George, CFP, TEP, CLU, CHS, is managing director, tax and estate planning at Canada Life, Wealth Distribution. Wilmot can be contacted at wilmot.george@canadalife.com.

Attribution rules

Summary of attribution rules for gifts and loans

Gifts while living versus at death

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