Debt relief is an option
If you lend money to a baby, you may forgive the loan during your lifetime or after your death. Of course, it’s best to only do that if you happen to know you will not need the cash or want it back in the long run.
If you might have loaned your kids different amounts of cash, documenting the loans may help ensure an equal division of your estate. Some wills include what’s often called a “hotpot” clause that takes under consideration all outstanding loans, in order that a baby doesn’t receive a disproportionate gift or a forgiven loan, in addition to an equal share of the estate.
What are the tax implications of Gift or loan?
Gifts generally don’t have any tax implications in Canada. This is different from the US, where there may be a present tax. US residents in Canada still need to pay attention to these implications within the US. Only two situations can trigger additional income taxes for folks: the sale of an asset with a capital gain or the withdrawal of an asset from a tax-advantaged account, a registered retirement savings plan (RRSP). However, gifts themselves would not have tax issues for adult children.
If your child took out a loan for investment or business purposes, forgiveness can have tax implications. This is partly since the interest on funds borrowed to buy investments or finance a business is often tax deductible for the borrower.
As a result, forgiveness of such a loan can lead to a capital gain for the lender – whether it is forgiven during your lifetime. If the loan is forgiven after your death, it generally should have no tax implications.
If you lend money to a baby to speculate and the loan just isn’t paid by the Canada Revenue Agency prescribed rate of interest– currently 5% – the income could be attributed to you and taxed. You can provide money to an adult child to speculate without it being subject to an attribution requirement. However, if you happen to can lend it and claim it back without charging the prescribed rate of interest, the CRA will attribute interest, dividends, rental income and business income to you. However, capital gains are taxable to the kid.
Before you lend or gift money for a down payment…
When considering a present or loan, it’s best to before everything make sure that you’re capable of help your kids without compromising your individual financial security.
Granting a loan can have implications for family law, inheritance law and taxation. Get legal and tax advice from a certified skilled to guard yourself and your loved ones.
