What’s the difference between assets transferred through succession and assets gifted during your lifetime?
When a person dies, succession is the process and rules that govern how their property is transferred, whether they have a will or not.
The rules are used to determine:
- The laws that apply to the estate
- The conditions that must be met to be considered an heir
- The conditions for the transfer of estate assets
- The rights of certain creditors
What happens when someone dies without a will?
If a person dies without leaving a will, what happens to their estate varies depending on their province or territory. In Quebec, for example, the handling of the estate of a person who passes away without a will is determined by the Civil Code.
When you make a gift during your lifetime, you transfer ownership of property for free to another person (the donee), who accepts it.
There are certain rules attached to these gifts, which must be followed.
For example, in Quebec, the donor must be in a position to give the transferred possession or asset, and the donee must be able to receive it.
Why gift assets during your lifetime?
There are several potential benefits to gifting assets during your lifetime. Here are a few:
1. Supporting your loved ones
A gift could help your grandchildren pay for university or help your children buy their first home sooner.
2. Enjoying the emotional aspect of asset transfers
Making a gift during your lifetime gives you the opportunity to see your family enjoy it. You could gift a sum of money to a loved one to help them achieve one of their dreams, like taking a trip or buying a property abroad.
You might also want to pass on cherished possessions, like art or jewellery, so that your family can start enjoying them immediately.
3. Making life easier for your heirs
Some people decide to simplify things by selling their property and giving the proceeds to their loved ones.
This could be a good option if your heirs aren’t thrilled about the idea of taking on your rental property, or don’t have the right skills to manage some of your major assets.
But watch out: if there’s a capital gain, the donor will have to pay taxes on it, unless the property sold was their principal residence.
Pro tip: If you intend to gift assets that could create a tax impact for you, seek expert advice before you act (e.g., tax specialist, notary, accountant, etc.)
4. Making sure your wishes are followed
Making a gift during your lifetime can offer peace of mind. You can make sure that your child is the one who gets your piano… and not your ex, should you have forgotten to update your will.
5. Showing generosity
In addition to creating a positive impact, donations to charity may entitle you to a tax credit for charitable donations at the federal level (as well as in your province or territory).
How much can you give during your lifetime?
You can give as much as you want; there’s no law restricting gifts made during your lifetime to your heirs.
However, think carefully about whether it’s truly beneficial to do this before your death. Don’t hesitate to speak with your financial advisor to determine whether this option is right for you.
Keep in mind that the tax consequences may vary depending on what you want to give. Here are a few examples:
Money
Good news! There are no taxes to pay on cash gifts for either the donor or the donee.
Real-estate property
You won’t need to pay tax on any capital gains if you are gifting your principal residence.
If you want to gift your lakeside cottage, however, think it over carefully, because capital gains on second homes are taxable. If you sell it now and realize a capital gain, you’ll have to pay tax on it.
Registered Retirement Savings Plan (RRSP)
If you want to withdraw funds from your RRSP to make a cash gift to a family member, keep in mind that the money you take out will be taxable.
To make sure your savings remain tax-sheltered and to avoid taxes
upon death, it is recommended that an RRSP be transferred to the
surviving spouse (after death). Even if it’s transferred to a family
member other than the surviving spouse, there will be taxes to pay on
the RRSP.
Tax-Free Savings Account (TFSA)
You can withdraw money from your TFSA and gift it to your heirs during your lifetime without being taxed.
Tax-Free First Home Savings Account (FHSA)
If you want to take out funds from your FHSA to make a cash gift, your withdrawal will be taxable.
Non-registered investments
As a general rule, capital gains on non-registered investments are taxable, even if your intention is to gift the money.
What questions should you ask yourself before gifting assets during your lifetime?
Why do you want to do it?
You might want to help your children by gifting them a home or by selling some investments so that you can give them money. This is a personal decision that’s up to you. However, it’s a good idea to talk it over with your financial advisor to ensure that it doesn’t have a negative impact on your other objectives, such as retirement.
When should you start?
There’s no recommended age or age limit. People who choose to gift assets usually start when they have a family and a fairly established estate. It’s important to think about your other priorities, like retirement planning. It’s common to start thinking about this during the estate planning process. But it’s also possible to start earlier, for example, if an entrepreneur wants to transfer ownership of their business.
How will it affect your finances?
Before transferring your assets to the people you love, plan your retirement and think about your future. We can’t say it enough: you need to take care of yourself before you can take care of others.
How do you make a gift during your lifetime?
Think ahead and make a will
Since it’s difficult to pass on everything you own during your lifetime, it’s still wise to write down your final wishes. A lawyer or notary can help you make a plan for what possessions and assets should go to whom.
Speak with your financial advisor (or financial planner)
Once you’ve decided to make a gift, make an appointment with your financial advisor (or financial planner). They will be able to guide you through the process and determine how the gift will affect your financial situation.
Get help from experts
To ensure that you have the best strategy for your situation, get help from the right experts. Your notary, lawyer and tax specialist can help you understand and follow applicable laws.
Draw up a legal document
This is a contract specifying where the gifted asset came from and its date of transfer, and applies to all assets given during your lifetime, except gifts of movable property. If you have simply written down your gift in an unofficial document, the gift is declared null and your heirs could contest it after your death.
Good to know: Drawing up a legal document can also offer increased protection in the event of separation or divorce, by excluding the gifted property from family assets. However, the spouse’s consent is required.