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Want to transfer assets to your children now? Avoid these 5 costly mistakes

An elder couple moving into a new home.

We’ve all heard the saying, “You can’t take it with you.” But when is the best time to pass your assets on? Transferring assets to your children while you’re alive (rather than upon your death) may be an appealing prospect. After all, giving now allows you to share in the enjoyment and could ensure that a much-loved property stays in the family.

Before you turn your asset succession dreams into reality, consider the following five mistakes that you’ll want to avoid making.

1. Not taking your children’s wishes into consideration

You may have a strong emotional attachment to an asset such as a property, but that doesn’t mean that your kids do, too. If it’s a recreational property, will they actually want to spend time there, and are they prepared for the cost of its upkeep? If it’s a rental property, are they prepared to take on the responsibilities of being a landlord?

Have frank conversations with your family to confirm which kids (if any) are interested in taking on the property — and how they’ll cover the cost of its upkeep once it belongs to them.

2. Not equalizing their inheritance

If one or more of your children don’t want to receive a specific asset such as a property, and you want your children to inherit equally, you’ll need to work with your legal and tax advisors to find ways for them to do so.

Consider giving those children other assets, such as a portion of your art collection or certain investment funds. You can also purchase a life insurance policy that will pay out, on your death, a value equal to the assets you’re giving to some of your children now.

3. Not confirming responsibilities among the future owners

If more than one child will inherit a specific asset from you, consider engaging a lawyer to draft a co-ownership agreement. The agreement would help to protect the investment and set guidelines for how it will be used, and who will be responsible for any necessary maintenance or administration.

The agreement should also clarify what will happen if a party wants to sell their interest in the asset.

4. Not addressing the capital gains tax issue

A capital gain refers to the difference between the cost of purchase and the fair market value of a capital asset, such as real estate.

For example, let’s say you purchased a property that is not your principal residence many years ago for $150,000, and it’s now worth $850,000. That means you have a capital gain of $700,000, of which 50% ($350,000) is taxable. Including that $350,000 on top of your regular income could easily push you into a very high tax bracket.

Even if you gift the property, you’ll still be deemed to have received fair market value for it, and you’ll have to report the disposition of the property and pay the tax liability — even though you haven’t actually received any money for the asset.

There are ways to address the capital gains tax issue. Talk to your MD Advisor* about claiming the capital gains reserve, buying permanent life insurance or setting up an inter vivos trust.

5. Not accounting for the land transfer tax

Though potentially much smaller than the capital gains tax, the land transfer tax (also known as a property transfer tax) is often overlooked as part of the overall cost of purchasing real estate. It comes into play when real estate is transferred for value (so if you gift a property to your children, it may not be applicable).

The calculation of this tax is based on the purchase price of the property, but provinces and cities across Canada charge different rates. For example, in British Columbia, on the purchase price of a home that’s valued at $2 million, the property transfer tax would be:

  • 1% on the first $200,000; and
  • 2% on the portion between $200,000 and $2 million.

If your child is purchasing the property from you as a first-time homebuyer, they may qualify for a land transfer tax rebate, depending on the province.

Transferring assets during your lifetime can be rewarding, but you’ll need a plan that makes sense for both you and your heirs. Talk to an MD Advisor to help you make the right short- and long-term decisions for you and your family.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.