A parent's guide to low-payment gifts and loans

Loan forgiveness is an option

If you lend money to a child, you can forgive the loan during your lifetime or when you die. Of course, you should only do so if you know you won't need or want a refund in the future.

If you have loaned different amounts of money to your children, documenting the loan can help ensure an equal distribution of your estate. Some estates include a clause called a “hotpot” that defines all outstanding loans, so that one child does not receive a limited gift or forgiven loan, and an equal share of the estate.

What are the tax implications of a gift or loan?

There are generally no tax issues with gift giving in Canada. This is different than the US, which has a gift tax. US citizens in Canada still need to remember these US restrictions. Only two situations may result in additional income taxes for the parent: selling assets for a capital gain or withdrawing assets from a tax-sheltered registered retirement savings plan (RRSP) account. But making a gift in itself has no tax problems with older children.

If your child's loan was for investment or business purposes, forgiving it can have tax implications. This is partly because interest on loans from funds borrowed to buy an investment or finance a business is usually tax deductible for the borrower.

As a result, the forgiveness of such a loan can lead to a large profit for the lender—if it is forgiven during your lifetime. If the loan is forgiven upon death, there should be no tax implications.

If you lend money to a child to invest and the loan does not have a rate set by the Canada Revenue Agency – currently 5% – the income may be returned to you and taxed to you. You can give money to an older child to invest and not be under obligation. But if you borrow it and you can pay it back without charging a fixed amount, the CRA will pay you back the interest, dividends, rental income and business income. The monetary gain, however, is taxing on the child.

Before taking out a loan or gift for a down payment…

When considering a gift or loan, you must first make sure that you are in a position to help your children without jeopardizing your financial security.

There may be family law, inheritance and tax implications in making a loan. Seek legal and tax advice from a qualified professional to protect yourself and your family.