Did you help your daughter with her mortgage down payment for her dream home? Or maybe you gave your son a collectible watch passed down from your grandfather. These are examples of a living inheritance in Canada, but what does that mean exactly?

Each gift might have come out of their inheritances, but it’s worth it, right? You might decide to pass down money before you die so your children can actually use it when they need it. That’s considered a living inheritance in Canada. 

But hang on, aren’t inheritances intrinsically for events of death? Traditionally, yes. Today? Not quite! 

Things are changing, and Canadians want their kids to enjoy money when they need it most. Plus, you’ll reap a few unique tax benefits — just ask your wealth manager. 

Does that mean you should transfer your entire estate to your kids now? Absolutely not. But living inheritance certainly warrants a solid chapter of consideration in your estate planning. We’ll help you understand living inheritance in Canada, how to maximize its benefits, and how it translates into your taxes.

What is a Living Inheritance?

A living inheritance is a gift of monetary value passed down from one person to another — often one’s children — before death. The motive behind living inheritance is for your beneficiaries to enjoy and make use of an inheritance’s value at a convenient time. In addition, there are financial and tax benefits to partaking in a living inheritance as opposed to a traditional inheritance.

The value and scenario could vary. A living inheritance might be $200 every Christmas and birthday, amounting to $400 a year or $20,000 over 50 years. Similarly, it could be passing down a family heirloom to your kids while you’re still alive. Alternatively, you might provide financial support for your spouse’s education so they can advance in their career. The possibilities are endless!

On the other end, a traditional inheritance is passed down to your beneficiaries only after you die. You’d indicate their beneficiary status in your will. Then, you’d find an executor to handle your final return and disperse funds to your beneficiaries — after you’ve already died. 

Living inheritance in Canada is a great way to help your kids, family and other loved ones when they need it most. The most common type of living inheritance in Canada is the mortgage down payment. Over 40% of Canadian homeowners between 18 and 38 received financial assistance for their down payments from their parents or family. The average gift? Over $40,000. But why? 

Why the living inheritance trend is rising in Canada

For starters, just take a look at the average Canadian property price: $739,400. Then, add a few ten thousand dollars more for cities like Toronto or Vancouver. It’s more difficult for your kids to buy a home than it was for you. 

So, a parent watching their children struggle naturally wants to help. At first, you might contemplate saving a nice inheritance for them to enjoy when you pass. But why not watch your kids achieve their dreams and enjoy the benefits of your inheritance now? This is especially true if you want to see your children start families of their own — something that may be unaffordable if they were to do it without your financial support.

One CIBC director tells Global News that parents who have a solid retirement strategy in place want to see their kids enjoy inheritances “while they’re still alive.” Still, many Canadians prefer to wait for a “trigger” before sharing wealth with their kids. Can you think of a more traumatizing trigger than COVID-19? Pair the pandemic’s destruction with a short period of low interest rates, and you have a property-buying extravaganza — fuelled by living inheritances to cover the down payments. Thanks, mom and dad!

Another trend to note is the reverse mortgage, which Canadians have been using twice as often in the last five years. Why? Today’s retiring Canadians want to use their money while they’re still alive and kicking. And a natural result is passing some of that wealth to their kids. The best part is that parents won’t lose their home — they’ll tap into their home equity while still retaining some of it for a traditional inheritance — if they’d like. 

Still, living inheritances grow in prominence with household income. If you have an income of $100,000 annually or more, you’re twice as likely to gift your kids with a down payment. 

Related Reading: Canada Inheritance Law: How it Works

Is a living inheritance taxable?

Living inheritances are essentially gifts and there is no gift tax in Canada. Meaning? Living inheritances are not taxable in Canada. In other words, you do not have to declare living inheritances as income on your tax return. This applies to all kinds of gifts, including cash, property, assets, heirlooms and so on.

Although, there are some instances where a living inheritance may trigger tax. Let’s take a closer look below:

• Income-producing asset. If you inherit an income-producing asset, such as a business or rental property, you will be required to report the income on your tax return. You don’t have to pay tax on the inheritance of the asset itself, but income derived from the asset once it’s in your possession is taxable. This is true with both living and post-mortem inheritances.
• Capital gains tax. When property is passed through inheritance after death, there is a deemed disposition of all property. This means any property the deceased owned is considered “disposed of” before it’s passed onto its next owner. On the deceased’s final tax return, they will pay any capital gains tax on property deemed disposed. This can cut deep into inheritances, as you can imagine. Many choose to pass on the property before death via a living inheritance to avoid triggering capital gains tax upon death. The disadvantage of this? If the beneficiary wants to sell the property, they will be left with the capital gains tax bill rather than the original owner. This can be a big bill — one that the beneficiary might not be able to afford.

Apart from quicker convenience and tax benefits, what other benefits can you reap from a living inheritance?

Pros of a Living Inheritance

A traditional stance might caution against gifting your kids too soon. But imagine this scenario: a young adult receives an inheritance of $150,000 upon your death — the first time they’ve ever had that much dough. You’ve heard the anecdote, how sudden wealth usually disappears quickly. They could spend it all in a shoddy investment.

Here’s how a living inheritance in Canada can help:

• Teaches financial responsibility: Forbes describes living inheritance as a way to teach your kids responsible financial habits early on. You could gift them a partial, living inheritance and help them learn how to invest it properly. Maybe they’ll make a mistake and invest in a doomed stock they had no knowledge about. At least they did it with some of their inheritance versus all of it. Now, they’re a bit more experienced and prepared to handle a larger sum of money. 

• Reduces familial conflict and confusion: What if your kids can’t figure out how to split your assets when you pass? Say you decide on a three-way split between your spouse and two children. But how much is that gold necklace worth? And how should your beneficiaries split three properties with different mortgages, property values, and rental income? Living inheritances allow you to discuss these details while you’re still alive and reduce tension about inheritances upon your passing. 

• Tax benefits and reducing size of estate: Living inheritance in Canada is considered a gift. Meaning? It’s not taxable. Don’t get us wrong — regular inheritances aren’t subject to an inheritance tax in Canada, either. On top of that, you might benefit from sharing some wealth with your kids if they’re in a lower tax bracket. Still, your estate might pay more taxes upon your passing when your executor files your final return than if you had used living inheritance. Reducing the size of your estate helps you avoid the brunt of the administration estate tax.

Is it better to pass down property in Canada before or after death?

The short answer? It really depends. From a purely financial perspective, it makes sense to share your wealth with your children, family and loved ones before you pass. Your estate can avoid or reduce probate, you can reduce your liability on your final tax return, and allow your close ones to share your wealth before you pass.

With all that said, there are some qualitative aspects to consider. If you give wealth to your loved ones, that doesn’t mean they’re going to use it wisely. Watching loved ones squander a financial gift you gave them can be unpleasant — especially if you worked your whole life to acquire and build wealth. Money can change the dynamic of a relationship quickly and this is something to consider carefully.

In addition, timing is something to consider too. As you get older and older, it makes sense to pass on wealth to loved ones as part of your estate planning. But what is the sweet spot? You don’t want to give away money and assets when you still need them to facilitate your lifestyle.

At the end of the day, living inheritances in Canada are optimal in many ways. However, it’s important that you take in the entirety of the situation — not just considering the financial and tax perspectives. Each family is unique so passing on wealth is a personal decision!

Related Reading: How long does it take to receive inheritance from a will Canada?

Is it better to gift or inherit property Canada?

From a quantitative perspective, it is better to gift property through a living inheritance in Canada. There are financial and tax advantages to gifting part or all of your estate prior to death. Although, passing on your wealth through inheritance after death is also an option. For the beneficiary, there isn’t much difference between gifting and inheriting. Either way, they’re not required to report gifts and inheritances on their tax return as income. However, the deceased may have to pay a huge chunk of tax out of their estate before it reaches beneficiaries which impacts their inheritance. This is why gifting through living inheritance in Canada is more favourable.

Can the Canadian government take a living inheritance?

In short, no, the Canadian government cannot seize or tax a living inheritance. There is no gift tax in Canada which means living inheritances are not subject to taxation. However, with wealth comes responsibility. If the recipient of your living inheritance doesn’t manage their new wealth appropriately, there’s a chance they’d have to pay taxes to the Canadian government which eats into living inheritances. For instance, if you give property to your child prior to your death in the form of a living inheritance and the child sells the property, a chunk of the property’s value will go to a capital gains tax bill.

How do I set up a living inheritance?

Ready to set up a living inheritance? It’s actually quite simple! Similarly to writing a will, some planning and consideration should go into a living inheritance. For instance, who among your family and loved ones could use financial support right now? Furthermore, how can you add value to your loved ones’ lives aside from just giving cash? How much of your wealth should you keep to maintain an optimal lifestyle? Asking yourself these kinds of questions will help you plan what wealth to pass on and to who through a living inheritance.

Check out how to pass on cash, investments and property below:

• Cash. Transferring cash through a living inheritance is simple: transfer the cash to the beneficiary… and that’s it! The only additional step you might want to take is keeping a record of the transfer to confirm it was a gift. In the event of a CRA audit, this record keeping may come in handy. In addition, the beneficiary might need to prove source of funds with a financial institution if they’re planning to use the gift for a down payment or other loan purpose.
• Investments. If you want to transfer stocks, bonds, guaranteed investment certificates (GICs) or other investments, you usually have to complete some paperwork with the financial institution where the assets are held. Normally, this is some kind of “transfer form”. Once that’s complete, the investments will be transferred to your desired beneficiaries and that’s it!
• Property. To transfer ownership of property through a living inheritance, simply put the beneficiary on the title of the property. A wise strategy is to maintain joint ownership of the property with beneficiaries. When you pass, the surviving joint owner automatically obtains full ownership of the property. For example, if a married couple has both of their names on a house’s title and one dies, the surviving spouse automatically obtains ownership. There’s no probate, capital gains or other taxation to consider.

Related Reading: Estate Planning in Canada: A Checklist

Do I have to declare living inheritance money as income in Canada?

No! That’s one of the greatest benefits. Your children don’t have to declare living inheritance money as income in Canada because it’s considered a gift. Plus, you’ve already paid taxes on that wealth through your regular tax filings. 

Bottom line? Living inheritance in Canada can be tricky. If you want to maximize its benefits for both yourself and your beneficiaries, it’s best to consult a professional. Discuss tax implications with your wealth manager and explore the longevity and benefits of gifts.

Remember, you can’t take back a living inheritance. It’s just as permanent as a death inheritance. Keep your retirement needs top of mind and secure your own investment strategy before passing down a living inheritance. This might look like a trust or gradual wealth transfer plan — but either way, you’ll want to dive into the details with a wealth manager. 

Book your call with a wealth manager today!