Living inheritance is the act of gifting part of your estate to loved ones while you're still alive rather than waiting for the traditional inheritance process after death.
Living inheritance is becoming an increasingly popular option in Canada as more people seek to provide financial support or meaningful gifts to family members when they can still see the impact. Whether it's helping a child buy a first home or supporting a grandchild’s education, living inheritance allows you to be part of your legacy today.
In this article, we’ll explore the concept of living inheritance more, including the associated benefits, tax implications, and legal considerations.
Benefits of living inheritance
Living inheritances come with many emotional and practical benefits for both the giver and the receiver of the inheritance. Here's a quick look at why it can be a win-win for everyone involved:
Benefits for the giver
Emotional benefits
- Witness the impact: See the positive changes your financial support brings to your loved ones.
- Celebrate milestones together: Share the joy of helping family members and loved ones achieve goals like buying a first home, paying off their student loans, starting a business, and more.
- Strengthen family bonds: Opening up communication with your family about financial matters can build trust and bring you closer together.
Practical benefits
- Simplified estate planning: Fewer assets in your estate could decrease your estate’s likelihood of going through probate. If probate is necessary, as is often the case if you solely own real estate, fewer assets can lower the amount of probate fees your estate would have to pay with the application. A smaller estate also makes estate settlement easier.
- Teach financial skills: Offering financial support to your loved ones lets you help them make smarter money management decisions.
Benefits for the receiver
Emotional benefits
- Support when you need it most: Receiving an early inheritance of financial help when you need it can make a significant difference in your life.
- Ability to show appreciation: Unlike receiving a traditional inheritance from a loved one’s estate after they’ve passed away, a living inheritance gives your beneficiary the opportunity to share their appreciation and experiences with you personally.
- Reduced stress later: Clearing up inheritance matters now can prevent family disagreements or confusion in the future.
Practical benefits
- Early financial boost: Getting help with life expenses like tuition, a home down payment, or launching a business.
- Debt relief: Get ahead on paying off student loans, mortgages or other financial burdens.
- Asset appreciation: Gifted assets have the potential to grow over time, so receiving them sooner can also boost the receiver’s financial future.
Legal considerations of living inheritance in Canada
It should be clear that you have no legal obligation to give early inheritance to your spouse, partner, children or relatives.
After you pass away, there are estate laws that take into consideration whether your dependents, such as a spouse or child, were left adequate provisions for their support or maintenance, but these laws don’t apply to early inheritance.
Taking a loved one’s asset and claiming it for yourself as an early inheritance without their permission can be considered theft, and you may face legal repercussions.
If you’d like to receive an early inheritance, you must discuss your wishes with your loved ones.
Tax implications of early inheritances
Here are some other important ways taxes might affect giving or receiving a living inheritance in Canada.
There is no gift tax in Canada
Canada does not impose a direct gift tax on financial or asset transfers made during your lifetime. There’s no inheritance tax on traditional inheritance either. However, gifts given during one’s lifetime may still trigger other tax implications, especially for you as the giver.
Capital gains tax still applies
When you give assets like stocks, property, or investments that have appreciated in value, the Canada Revenue Agency (CRA) treats this as if you sold the asset at its fair market value (FMV). You may be responsible for paying capital gains tax on the difference between the original purchase price and the current value.
Whether the transfer of the asset is considered a gift or an inadequate sale determines whether the asset could be double-taxed:
- A gift is made without expecting anything of value in return and is documented as such (documented intent as a gift).
- An inadequate sale occurs when the transaction is structured like a sale (with a sale agreement), but the payment is far below the FMV.
Considerations for your spouse or common law partner
Transferring assets between spouses or common-law partners generally does not trigger immediate tax consequences under Canada’s "spousal rollover" provision. This provision defers capital gains tax until the spouse or partner sells the asset or passes away.
Attribution rules can influence family gifting
Canada's attribution rules may apply to family wealth transfers, such as when assets or income-generating investments are gifted to family members. These rules are designed to prevent tax avoidance by attributing the income or gains from the gifted asset back to the original owner (the giver) in some cases, especially when the recipient is a spouse or minor child.
Note that these rules may not apply if FMV is paid for the asset or if the recipient has income other than the income generated by the asset (like employment income).
Read more about attribution rules in the Government of Canada’s Interspousal and Certain Other Transfers and Loans of Property bulletin.
Lifetime Capital Gains Exemptions (LCGEs)
For small business owners or farmers, you can give shares or interests in a qualified small business corporation or farm property while benefiting from the Lifetime Capital Gains Exemption, which shelters up to $971,190 in gains (as of 2023) from taxation.
Best legal practices for living inheritances
- Ensure all gifts or transfers are well-documented to avoid confusion or legal disputes down the line.
- For advice on your personal circumstances, consult with a tax advisor or estate planning lawyer before making significant gifts to understand relevant tax implications and how best to structure the transfer to minimize your (and your recipient’s) tax burden.
- Before gifting, consider the potential impact of your gifting on your own financial security and estate plan to ensure you're not compromising your long-term needs
Steps to implementing a living inheritance
Giving a living inheritance may be more or less complex depending on what you’re giving and who you’re giving it to. So here’s a step-by-step guide to help you through the process.
1. Assess your financial situation
Before starting a living inheritance, it's important to evaluate your own financial needs and stability. You should have enough resources to maintain your lifestyle and cover potential future expenses before thinking about gifting assets to others. Consider evaluating your situation with factors like:
- Your current and projected income
- Retirement savings and plans
- Healthcare costs
- Long-term care needs
2. Think about what to give
Decide which assets you want to include in your living inheritance. This could be anything, including:
- Cash gifts
- Investments (stocks, bonds, mutual funds)
- Property (a primary residence, a cottage, a business office)
- Family heirlooms or other valuable possessions
3. Choose your beneficiaries
Identify who you want to receive your living inheritance. This typically includes children, grandchildren, or other close family members, but really it can be anyone.
Consider the individual needs of those you’re giving inheritance to, and their circumstances when deciding how to distribute your assets.
When in doubt, it’s always good to discuss a living inheritance with them instead of guessing or making assumptions.
4. Develop a gifting strategy
Plan how and when you'll distribute your assets as living inheritances. Some options include:
- Larger one-time gifts for specific purposes (e.g., home down payment, education expenses, car purchase)
- Gradual transfer of assets over time, which can also be a way to teach smart financial management
- Different gifts for multiple recipients, the same gift for multiple recipients, multiple gifts for one recipient, etc.
- Using financial tools like living trusts to help manage or hold assets
5. When to consult with professionals
Working with legal and financial professionals can be a good idea if you’re curious about how different tax or asset scenarios affect yourself and your beneficiaries. Here's a few tips on how to engage with different experts:
- Estate Planning Lawyer: Consult with an experienced estate planning lawyer to:
- Draft or update your will and trust documents if you’ve got a complex estate or need advice
- Ensure your living inheritance plan aligns with your overall estate plan
- Address potential legal issues
- Financial Advisor: Work with a financial advisor to:
- Analyze the impact of gifting on your current and long-term financial goals
- Develop strategies to maximize tax benefits
- Explore investment options for gifted assets
- Tax Professional: Consult a tax expert if you’d like to:
- Understand the tax implications of your gifting strategy
- Ensure compliance with governmental regulations
- Optimize your plan for tax efficiency for yourself and your beneficiaries
6. Implement your plan
Once you've developed your strategy and consulted with professionals where needed, you can begin giving living inheritances!
Remember as you implement your plan to keep detailed records of all gifts and transfers and communicate openly with beneficiaries about your intentions and expectations.
7. Review and adjust
Regularly review your living inheritance plan with your advisors, especially if you plan on giving multiple inheritances over a long period of time. Adjust as needed based on changes in your financial situation, tax laws, or family circumstances.
Comparing living inheritance to traditional inheritance
Pros vs Cons
How much can you inherit without paying taxes in Canada?
There is no inheritance tax in Canada for traditional inheritance through a person’s estate. You could inherit an entire estate without paying any taxes.
However, if you have an early inheritance or inherit an item that generates income, you may have to deal with taxes, which would most likely vary based on the value of the inheritance.
Do I have to pay taxes on a house I inherited in Canada?
If you inherit a primary residence through traditional inheritance, such as succession rules or through a will, you will not owe capital gains tax when you inherit it or if you sell it later on.
But if you inherit a non-primary residence through traditional inheritance, if you sell it for a profit then the rules of capital gains tax apply.
If you inherit a house as an early inheritance, capital gains tax and attribution rules may require you to pay taxes on the property.
Situations where one type of inheritance might be more beneficial than the other
Living inheritance
- Beneficial for younger beneficiaries: If recipients need financial support for major life events (buying a home, starting a business, paying for education), a living inheritance lets you provide assistance when they need it most
- Test-drive inheritance: You can observe how beneficiaries handle significant financial gifts, which gives you an opportunity to provide guidance on financial management but also see how well they handle gifts if you also want to leave them something in your will
- Emotional connection: You can enjoy shared experiences and strengthen family bonds by helping loved ones during your lifetime
Traditional inheritance
- Beneficial for maintaining control: If you want full control over your assets for as long as possible, leaving only a traditional inheritance in your will help you maintain security throughout your lifetime.
- Larger, more meaningful gifts: Wealth may accumulate over time, and a larger estate can be passed down in one go, potentially giving greater financial security to your beneficiaries later in life.
- Tax planning flexibility: Some estate and financial planning strategies, like using trusts or exemptions, could provide tax advantages that make a traditional inheritance more financially efficient.
- Can be automatic with inheritance rules: Inheritance rules in Canada outline what happens to your estate if you pass away without a will, and give first priority of inheritance to your spouse, partner, or children.
Common misconceptions
Myth: Living inheritance is only for the wealthy
While large gifts are often associated with living inheritances, they can be of any size. Even small, regular gifts can constitute a living inheritance and provide meaningful support to beneficiaries.
But larger gifts can also be split. For example, a parent could help pay half the downpayment on a home while their child pays the other half. In fact, with increasing housing prices on everyone’s minds, a 2021 Canadian survey found that approximately one in six (17.3%) residential properties owned by people born in the 1990s were co-owned with their parents.
Myth: Giving a living inheritance means losing control of assets
Givers can structure living inheritances with conditions or through trusts to maintain some control over how the assets are used. It's not an all-or-nothing proposition.
Myth: Living inheritances are always tax-free
While many types of gifts can be tax-free, and there is no gift tax for gifting assets in Canada, there are other taxes to consider, including capital gains taxes. It's important to consult with tax professionals if you need to so you can better understand the potential tax consequences on an early inheritance.
Myth: Living inheritances will spoil beneficiaries
When structured thoughtfully or given with proper guidance, living inheritances can actually teach financial responsibility and allow givers to guide beneficiaries in managing wealth.
Myth: Living inheritances are only for children
Living inheritances can be given to anyone – children, grandchildren, friends, or charitable organizations.
Myth: You need a lawyer to give a living inheritance
While professional advice is recommended for large or complex gifts, small, straightforward living inheritances can often be given without legal assistance.
Myth: Living inheritances must be large lump sums
They can be structured as any kind of gift, including small gifts, occasional larger gifts, or a combination of both.
Myth: Living inheritances are always better than traditional inheritances
The best approach depends on individual circumstances. Sometimes a traditional inheritance or a combination of both may be more appropriate for your situation.
Document your future wishes today
Living inheritances are flexible, and estate planning in Canada can be too. Willful lets you make free unlimited changes to your will, power of attorney documents, and asset lists, saving you thousands in lawyer fees if you ever choose to give a living inheritance as well.
There are many smart ways to include your family in your will, and protecting your loved ones in the future starts with making your plan today.
