# EARLY inheritance



## OK-bachelor (May 24, 2011)

Some clever parents/families are downsizing their property (s) early and putting the money into their kids properties to keep it out of the bank's deep pockets. The parents then move in with the kids, or they move into something less expensive , and their kids pay them an interest free monthly income , or a small interest of 1-2 %.
Is this common ? My family is in the early discussion faze of this concept , and I was wondering how many thousands of dollars a lawyer would charge to write up a contract for something like this. Thanks for reading !


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## kcowan (Jul 1, 2010)

My friends did this NW of Toronto on an acreage. Their parents paid for a 2-bedroom addition on their home. It worked fine while both parents were alive. Then Dad died and Mom was lonely and isolated. So they bought her a townhouse in Georgetown and the apartment sat empty. I used it on busness trips to Toronto.

So I would say that it is a good idea as long as nothing changes. In their case, when it came time for them to sell the acreage (empty nesters), they did not get a fair return on the extra inlaw suite compared to the investment.


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## iherald (Apr 18, 2009)

OK-bachelor said:


> Some clever parents/families are downsizing their property (s) early and putting the money into their kids properties to keep it out of the bank's deep pockets. The parents then move in with the kids, or they move into something less expensive , and their kids pay them an interest free monthly income , or a small interest of 1-2 %.
> Is this common ? My family is in the early discussion faze of this concept , and I was wondering how many thousands of dollars a lawyer would charge to write up a contract for something like this. Thanks for reading !


the only thing that I thought of is that if you pay interest to them, you will be deemed to pay them interest at a 'normal' interest rate and they will be taxed on the normal amount of interest regardless of what you pay them.


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## MoneyGal (Apr 24, 2009)

iherald said:


> the only thing that I thought of is that if you pay interest to them, you will be deemed to pay them interest at a 'normal' interest rate and they will be taxed on the normal amount of interest regardless of what you pay them.


Not necessarily. Loans are attributable and a rate is prescribed (generally) when there is a tax consequence and (specifically) when the money is being used to invest - neither case would come into play here, at least as I understand what is proposed. 

From what I see, what is being proposed is:

1. Parents sell principal residence. Any gain is tax-free. 

2. Parents gift money to children. No tax payable on gifts between parents and their adult children (if there is no tax avoidance purpose and the money is not for investment purposes). 

3. Children make periodic (monthly?) gifts of money to the parents. This isn't a loan, as far as I can tell, for tax purposes - it's a straight-up gift. They are free to set whatever "interest" rate they choose. Strictly speaking, it isn't interest - unless mom and dad have loaned (not gifted) the funds to their children. If they've loaned, not gifted, they may be required to use the prescribed rate - as noted above by iherald - and they would need to report the interest as income. 

I'm not entirely sure what agreement would be spelled out by a lawyer. You might also consider visiting an accountant to confirm any tax consequences of your proposed course of action.


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## OK-bachelor (May 24, 2011)

Good info there , thankyou. Here's the deal , I am un-married , no common law , no kids on the side ,gambling / prostitution habits, etc...  I live in a home shared with my sister and her husband , and between them and myself , the mortgage/maintenance is shared 50/50 . In a few years they want to move to the island and buy a bigger lot , with an extra space big enough, for our Mom & Dad. Our Mom & Dad could sell their house in Kelowna for $500 K , and gift 250 K to my sister to put down on the island property - which would be in addition to , the substantial amount of liquid cash , created when selling our current home . In this plan , my sister and her husband would not have to borrow much from the bank .

My half of the plan is the same thing , except my property would be a slightly different configuration in the greater Vancouver area , but I would still receive ( gift ) the remaining 250K from the sale in Kelowna. Our parents could then have two places to stay , and could come and go as they please , while evenly distributing the subsequent work , of slowly turning into fossils.


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## sags (May 15, 2010)

An advance tax ruling from the CRA would be advisable, as this looks like a tax avoidance scheme, that would fall under the GAAR provisions.


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## MoneyGal (Apr 24, 2009)

Sags. What tax are they avoiding? People can sell their principal residence with no tax consequences. And people can gift their children with money with no tax consequences. I don't see tax avoidance here.


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## OK-bachelor (May 24, 2011)

It's a plan worth some further investigation . I will tell you what 'scheme' this really is ; It's called the ' A common cornholing from the 1% avoidance scheme'

As far as I know ,for tax purposes, the scheme stated is indeed 'above board and legal' , at this time .However, chances are good in the future, that the 1% will lobby politicians to pass bills, outlawing any schemes that prevent them from cornholing the 99%.

My friends , the time for the discussion is now, and I am all ears when listening to opinions on real estate.


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## sags (May 15, 2010)

MoneyGal said:


> Sags. What tax are they avoiding? People can sell their principal residence with no tax consequences. And people can gift their children with money with no tax consequences. I don't see tax avoidance here.


The first post said it would be an interest bearing loan, requiring a legal contract. The interest would have to be reported as income by the parents, for both taxation and OAS/GIS eligibility calculations.

If it is a straight out gift.........there would be no tax implications.


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## Square Root (Jan 30, 2010)

OK-bachelor said:


> It's a plan worth some further investigation . I will tell you what 'scheme' this really is ; It's called the ' A common cornholing from the 1% avoidance scheme'
> 
> As far as I know ,for tax purposes, the scheme stated is indeed 'above board and legal' , at this time .However, chances are good in the future, that the 1% will lobby politicians to pass bills, outlawing any schemes that prevent them from cornholing the 99%.
> 
> My friends , the time for the discussion is now, and I am all ears when listening to opinions on real estate.


Not sure what you are talking about re 1%?


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## Square Root (Jan 30, 2010)

MoneyGal said:


> Sags. What tax are they avoiding? People can sell their principal residence with no tax consequences. And people can gift their children with money with no tax consequences. I don't see tax avoidance here.


Not sure attribution is required between adult children and parents? Whatever use is put to the funds?


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## MoneyGal (Apr 24, 2009)

sags said:


> The first post said it would be an interest bearing loan, requiring a legal contract. The interest would have to be reported as income by the parents, for both taxation and OAS/GIS eligibility calculations.
> 
> If it is a straight out gift.........there would be no tax implications.


Yeah, but he didn't say that they were not going to report the interest as income. 

These kinds of interfamily money transfers are a bit tricky.


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## OK-bachelor (May 24, 2011)

Occupy Wall Street was on my mind when I referred to the 1%. My parents probably wouldn't want any interest . But a trip to somewhere warm in the winter would be a big yes.


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## OhGreatGuru (May 24, 2009)

OK-bachelor said:


> Some clever parents/families are downsizing their property (s) early and putting the money into their kids properties to keep it out of the bank's deep pockets. The parents then move in with the kids, or they move into something less expensive , and their kids pay them an interest free monthly income , or a small interest of 1-2 %.
> ...


The confusion lies in the orginal post. If the parents make a gift to kids of the capital, and kids make a gift to parents of a monthly income, there are no tax consequences. But OP makes it sound as though they want the parent's "gift" to be structured as a loan. There may be good reasons for this. eg. 
a) If parents subsequently have to move to a care facility, and have insufficient income, how do they recover their "investment" in the family home;
b) Parents may understandably want to secure the promise of this monthly income stream against any unexpected circumstances affecting children's ability to pay (death, divorce, loss of jobs, etc)
c) If there are other siblings, and parents may want them to share in this "gift" when they pass on.

To an outsider it may appear that the parents are essentially purchasing an annuity from their children, payable partly in accommodation and partly in cash.


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## Freedom25 (Dec 3, 2011)

OK-bachelor said:


> Some clever parents/families are downsizing their property (s) early and putting the money into their kids properties to keep it out of the bank's deep pockets.


If it's their primary residence, how does selling it end up in the bank's deep pockets? If it's an income property, I don't think they can transfer it to their kid's houses without paying capital gains.

I don't think there is any tax advantage to the parents to hand over an inheritance early as a gift. We don't have inheritance taxes in Canada.

They can do it to be nice, but if they are doing it to somehow benefit the greater family from additional taxes, I don't think they're achieving that.


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## OK-bachelor (May 24, 2011)

Freedom25 said:


> If it's their primary residence, how does selling it end up in the bank's deep pockets? If it's an income property, I don't think they can transfer it to their kid's houses without paying capital gains.
> 
> I don't think there is any tax advantage to the parents to hand over an inheritance early as a gift. We don't have inheritance taxes in Canada.
> 
> They can do it to be nice, but if they are doing it to somehow benefit the greater family from additional taxes, I don't think they're achieving that.


 I thought my OP was pretty good , but it has some mistakes in the structure of the sentences. We (the kids ) have a mortgage , so if our parents payed off our mortgage with a gift of cash , and then we payed them back with installments of cash, then our family would be working together to keep interest out of the banks pockets.


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## iherald (Apr 18, 2009)

OK-bachelor said:


> I thought my OP was pretty good , but it has some mistakes in the structure of the sentences. We (the kids ) have a mortgage , so if our parents payed off our mortgage with a gift of cash , and then we payed them back with installments of cash, then our family would be working together to keep interest out of the banks pockets.


I'm sure you didn't mean it this way, but you said that they were going to give you money and you would pay them back. That's a loan. I can see the court seeing that you are paying them on a regular schedule and therefore call this a lone.


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## Plugging Along (Jan 3, 2011)

I think one can do an interest free loan at a non-arms length transaction without it being taxable. I think they look at the intent. Is there really just a gift.


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## MoneyGal (Apr 24, 2009)

What PA said. CRA would look to see whether there is a genuine or bona fide loan in place (CRA uses both terms). Is there really a loan - a written agreement, specified repayment terms, mechanisms for redress in the event of default or the death of either or both parties, a specified interest rate, etc. - or are these really just gifts?

I have to say that based on the first post, I assumed there would be no actual or bona fide loan, and my responses were based on that assumption. On the other hand - if the family is going to have a formal loan agreement, then mom and dad should be paid and should claim interest at the prescribed rate, which is currently 1%.


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## Xoron (Jun 22, 2010)

MoneyGal said:


> ..... then mom and dad should be paid and should claim interest at the prescribed rate, which is currently 1%.


Isn't this rate only applicable between spouses? Can you use the prescribed rate between parent and child? What about brother and sister?

Sorry for going off topic a little


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## humble_pie (Jun 7, 2009)

quite apart from the lawyer/loan issues, what about the well-being of the parents as they continue to age.

they will be doubly dependent upon their adult children. Dependent for housing. Dependent for income.

is it in their interest to prepare for a future when they shall be without a true home of their own, plus they will be uncertain recipients of "income" from one or both adult children that could be interrupted or even stopped by dire life events, as one poster has already mentioned.

king lear & all that.


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## Charlie (May 20, 2011)

Parents can give their money to kids if they want. No attribution. And the kids can give the parents a monthly allowance should they choose. I'd advise against this. Huge risk to mom and dad. If kids get in financial trouble, or go through a separation, mom and dad's nest egg is now at risk. The living allowance for Mom and Dad will be at the discretion of the kids. Mom and Dad lose their independence -- and often this is so important for their piece of mind. I think this is a terrible plan all around unless mom and dad are sure they don't need the capital for their own retirement and genuinely want to gift it to the kids.


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## MoneyGal (Apr 24, 2009)

Xoron said:


> Isn't this rate only applicable between spouses? Can you use the prescribed rate between parent and child? What about brother and sister?


You use the prescribed rate when attribution would otherwise apply. 

Attribution applies for transfers between you and (1) your spouse (2) minor children, nieces, nephews and grandchildren, and (3) anyone else with whom you do not have an arms-length relationship. 

The rules for (3) can get pretty complex. Here is the CRA bulletin: 

http://www.cra-arc.gc.ca/E/pub/tp/it419r2/it419r2-e.html

Generally brothers and sisters are assumed to not deal at arms-length so yes, you would use the prescribed rate.


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## Charlie (May 20, 2011)

technically, the attribution rules attribute the income earned on the loaned amounts to the person making a loan unless interest is paid at the prescribed rates. There's no requirement to pay interest at the prescribed rate, though it makes sense to do so if income is being earned in excess of that rate.

If we're discussing loans to buy a home, there's no income to attribute, so there's no need or tax advantage to charging interest. Interest free loans to brothers/sisters/kids/neices/parents etc by individuals for non income producing assets are all perfectly OK by CRA.


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## humble_pie (Jun 7, 2009)

why is everyone so hung up on attribution. Unless the parents are in a financial position to permanently give away the proceeds from the sale of their present residence, with absolutely no strings attached, then this plan is a potential landmine for them.

king lear & all that.


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## Charlie (May 20, 2011)

i agree with you humble. Kids shouldn't be spending their inheritance until mom and dad are in the ground. The attribution discussion was really a side thing that came up.


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## MoneyGal (Apr 24, 2009)

Agreed 100%. My MO is generally just to answer the question asked, though.


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## sags (May 15, 2010)

Whatever the kids gained by saving mortgage interest, the parents would likely lose from not receiving a return on their original 500,000.

A better solution may be for the parents to invest the capital and pay "rent" to the kids equivalent to their mortgage payments.


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## OK-bachelor (May 24, 2011)

East Indian and Asian families have done very well at this. Its one of the main reasons they (East Indians) own so much real estate , as they are experienced at pooling family money. I work with an Asian guy . and his mother in law paid off their mortgage and now they are paying her back interest free. We will have a look at all our different options . If something happened to the kids finances , then the property could be sold and the parents would get their money back. There would be more risk and hassle involved if a marriage were to go sideways. Thanks for all the replies


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## OK-bachelor (May 24, 2011)

Charlie said:


> i agree with you humble. Kids shouldn't be spending their inheritance until mom and dad are in the ground. The attribution discussion was really a side thing that came up.


My parents have NO money left ,and are living off thier CPP, and the only way for them to get some money is to liquidate and buy into something less expensive, probably away from that lake in Kelowna. My Dad is not a condo /apartment /old folks home kind of guy. They eventually want to live closer to my sister and I and get some help with all the house things they are getting too old to do themselves.


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## OhGreatGuru (May 24, 2009)

If the family dynamic is healthy, and if the parents have sufficient income for their present and future needs, I see nothing wrong with them gifting some of their capital for an addition on their children's house so they can live together. IMHO it makes economic & sociological sense in many ways.

However, as OP describes it, it sounds like parents don't have sufficient income without the use of their capital, hence the need for the children to pay the parents some form of monthly income. In this case the parents' contribution shouldn't be structured as a "gift" - it ought to be structured as a loan of some kind in order to protect the interests of all parties. That's where it gets complicated.


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## donald (Apr 18, 2011)

I'm a layman and learning but on the surface this does'nt seem that clever(maybe it is)If the parents have a house bought and paid for,which it sounds like and there going to sell it and then take the profit and buy the kids house outright....why would they want to do that.

-why don't they keep the profit(large sum im guessing)invest @least half of it and use leverage from the bank?(with the down payment from the other half)Isnt this historically one of the best times to take on a loan?with the low rates,if you can get it.(@ least your in two different asset classes)

-If they put all there excess capital back into real estate and it fall 30% this would'nt be clever would it,and worse there not liquid.

-Sooner or later the kids are going to want to build a realtionship with the bank(a history demostrating credit,can't not avoid a bank in some form for life)

-If the kids want a "comfort'' factor what about getting co-signed even....What are the reasons that this is a smart way to go?just curious to understand what the pros are.(i can see for the kids,but for the family as a whole?)Ive always been curious how east indians set this up must be a advantage.


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## OK-bachelor (May 24, 2011)

We already have credit with the bank , and my sister and I have been getting along well in the ten years we have been 50/50 on our current mortgage . She lives upstairs with her husband and 1yr. old daughter. 
For example ; we sell and walk in separate ways -they get 175k , I get 175K , all clear after paying off the bank.
The folks give them 250k, and my sister then buys a house on the island for 400K -cash , with a granny suite attached.
The folks give me 250 K and I put down 425 K on a house on the mainland, and I borrow the remainder from the bank. 
We give the folks a living allowance , and look after all the stuff that becomes more difficult as they age. They can visit us when they want ,and we can look after their things if they go on a trip.

Or , they could give us less , and invest the rest in something secure with a return , and they cash that in , if they need intense care at an old folks home.
* Old folks homes are 50K PER YEAR ! * and if sickness sets in, the last 5 years of a persons life generally becomes the most expensive.
The words of my financial advisor in a meeting today were ;The best gift parents can give their kids while they are alive is to not become a financial burden if ( or when) their health goes bad.


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