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GIFTS, LOANS AND INHERITANCES - RELATED PERSONS

  1. Is it possible to gift monies to my spouse to invest in mutual fund shares?
  2. Is it possible to loan monies to my spouse to invest in mutual fund shares?
  3. Is it possible for a client to gift mutual fund shares to a spouse?
  4. What are the Spousal Attribution rules?
  5. If the transferor spouse dies, what happens to the Spousal Attribution rules?
  6. When do the spousal attribution rules cease?
  7. Is it possible to gift one-half of mutual fund shares to a spouse so that the investment is held on a 50/50 basis - as tenants in common?
  8. If I currently own a mutual fund account, may I change the account to joint ownership with my spouse for income splitting purposes?
  9. Is it possible to gift mutual fund shares to a "minor"?
  10. Can a parent (or grandparent) gift cash to a minor to invest in mutual fund shares?
  11. Can a parent( or grandparent) loan monies to a minor for mutual fund investment?
  12. What is the most effective way for parents (or grandparents) to gift or loan to their children (or grandchildren)?
  13. What are the minor attribution rules?
  14. How are the accounts established if the parent (or grandparent) uses the irrevocable inter vivos family trust?
  15. Has a trust been established for a minor if the parent establishes an "informal" trust by simply registering a mutual fund account in the parent's name (in trust) without having a formal trust document prepared?
  16. What happens if the parent (or grandparent) dies, having previously established the irrevocable inter vivos family trust?
  17. If minors receive an inheritance from a deceased relative, how would a mutual fund or portfolio account be established?
  18. Do inheritances have to be included as taxable income in the recipient's hands in the year they are received?
  19. Is it possible to gift mutual fund shares to related adults (like adult children) and/or is it possible to loan/gift monies to a related adult to invest in mutual fund shares?
  20. What chapters of the Tax Library discuss gifts and loans and the attribution rules?

Appendices:

  1. Sales Information Bulletin #4812 dated July 26, 1994 on Minors' Accounts in Quebec
  2. Sales Information Bulletin #3369 dated October 8, 1985 on Income Splitting

1. Is it possible to gift monies to my spouse to invest in mutual fund shares?

Yes, but the spousal attribution rules (explained in Question 4) will apply to the investment.

2. Is it possible to loan monies to my spouse to invest in mutual fund shares?

Yes. If monies are loaned at no or low interest, the spousal attribution rules (as explained in Question 4) will apply

3. Is it possible for a client to gift mutual fund shares to a spouse?

Yes. Your client can use an assignment form to gift the shares or units. When the client gifts the shares or units, the spousal rollover rules apply (the transfer occurs at Adjusted Cost Base unless Fair Market Value is elected). See the Spousal Rollover section for more information. The client may want to elect to have the transfer occur at Fair Market Value if the client has net capital losses to apply against the taxable capital gain. Also, the spousal attribution rules will apply to the investment.

4. What are the Spousal Attribution rules?

Future simple income and capital gains attribute back to the transferor spouse regardless of whether the transferor:

Compound income does not attribute.

To track future attributing income and capital gains or losses versus non-attributing compound income, use the One + One. Establish the host account in the name of the transferee spouse. Although host account tax slips will be issued in the name of the transferee spouse, make sure the transferor spouse claims the attributing investment income in respect of the host account on his/her tax return. Also, establish a second account, again in the name of the transferee spouse, to which simple income (interest, dividends, capital gains dividends) from the host account is directed. All interest, dividends, capital gains dividends or capital gains earned by the second account is considered the second level or compound income which does not attribute back to the transferor. See Sales Information Bulletin #3369 dated October 8, 1985 attached as Appendix B to this section for more information on the One + One option.

5. If the transferor spouse dies, what happens to the Spousal Attribution rules?

There would be no deemed disposition of the shares in the deceased's hands because the transferee spouse is the owner of the shares at the time of the transferor's death. The spousal attribution rules cease.

The investment is not included in the deceased's estate for probate purposes either. Note: If the deceased spouse had loaned monies to the spouse to invest, the loan is, however, an asset that would be subject to probate. However, if the will of the transferor provides that the loan shall be forgiven upon death, the loan principal would not have to be included for probate purposes.

6. When do the spousal attribution rules cease?

The spousal attribution rules cease on death of a spouse, on divorce (and in certain circumstances on separation pursuant to a written separation agreement), or on the spouse who made the gift becoming a non-resident of Canada (for so long as the spouse is a non-resident of Canada).

7. Is it possible to gift one-half of mutual fund shares to a spouse so that the investment is held on a 50/50 basis - as tenants in common?

Yes it is possible, but not recommended. Assets held as Tenants in Common do not avoid probate or the deemed disposition and are not accommodated under the One-Plus-One for income splitting purposes.

8. If I currently own a mutual fund account, may I change the account to joint ownership with my spouse for income splitting purposes?

It is possible to add your spouse as a joint owner to your existing mutual fund account. Joint ownership will avoid probate on the account. Adding a joint owner is a disposition of half of the account for income tax purposes, but because the new joint owner is your spouse, the spousal rollover rules apply so that the transfer occurs at Adjusted Cost Base (unless Fair Market Value is elected) and there are no immediate capital gains consequences. The spousal attribution rules will apply to the investment so that the simple income and capital gains on your spouse's half interest in the account attribute back to you. However, income splitting with a spouse on a jointly held account is not easily accomplished, as the One-Plus-One cannot be used to track attribution of simple income and capital gains. So, if your objective is income splitting, adding the spouse as a joint owner is not recommended. It would be easier to track the attributing income if a separate account were established in the name of the spouse, if you are prepared to make a direct gift to the spouse. If you want to retain some control over the investment, it would be possible to use an inter vivos spousal trust - more information on this is contained in the section on Trusts. (Probate is also avoided with a direct gift to the spouse or inter vivos spousal trust prior to death, as the asset has been disposed of prior to your death, and does not form part of your estate. See section 7 on Probate for more information.)

Note that there is no right of survivorship on jointly held assets in Quebec, since joint ownership does not exist under the Quebec Civil Code. As a result, if Quebec clients are joint owners of an account, the surviving joint owner does not automatically become the owner of the account on the death of one of them. Rather, the deceased's interest will be distributed in accordance with his or her will. If the will needs to be probated, half of the account value will be included in the inventory of the estate for probate purposes. The good news is twofold:
(1) notarial wills are commonly used in Quebec and do not need to be probated, and (2) probate fees in Quebec are very low (as noted in Section 7), so that the costs of probate are not an issue in Quebec.

9. Is it possible to gift mutual fund shares to a "minor"?

Yes. It is possible to gift mutual fund shares directly to a minor. For new accounts, the Application form can be completed in the name of the minor as owner, and signed by the person setting up the account. However, if you are assigning an existing account to a minor, you would use the Assignment Form. It is important that Investors Representatives make their clients aware of the consequences of putting the account in the name of a minor. Representatives should take the time to point out to clients the effect of making the minor the owner of the account as clients may later be very upset if a clear understanding is not provided at the outset. In particular, note that once the account has been set up in the minor's name, it will generally be impossible for the minor to redeem funds from the account, or to transact other business on the account, until the minor reaches the age of majority. Also, the parents (or parties making the gift) generally cannot have access to the account or transact on the account, since they are not the legal owners of the account.

Note that Investors allows parents some freedom to transact on their childrens' mutual fund accounts established with a capital contribution of $25,000 or less - in those cases, we will permit the parents to carry out transfers from one Investors account to another in the minor's name, if the parents have completed an Investment for a Minor Child Release and Indemnity (Form C2293). This policy is described in more detail in Appendix 3 to Chapter 10 of the Tax Library. You should also note that the strict restrictions regarding access to minors' accounts are not applicable in British Columbia, where parents are by law the guardians of the property of their children, so they can make transfers and surrenders from accounts in the name of their minor children. Also, Quebec has its own rules regarding investments in the name of a minor, as outlined in Sales Information Bulletin #4812, a copy of which is attached as Appendix A to this section. Also, Ontario law allows parents to withdraw up to $2,000 per year from a child's accounts, subject to a lifetime maximum of $5,000 of total withdrawals.

It is also important to note that a gift of mutual fund shares to a minor is a disposition for tax purposes, so that the client will face capital gains taxes on the difference between the Fair Market Value of the shares at the date of transfer and the Adjusted Cost Base of the shares.

Note that attribution rules will apply to property gifted to a child, grandchild, niece or nephew who is under 18 years of age.

10. Can a parent (or grandparent) gift cash to a minor to invest in mutual fund shares?

A parent or grandparent can gift monies to a minor, but the attribution rules will apply. If the minor then wants to invest in Investors mutual fund shares, the minor will encounter the same restrictions on access to his or her account. See question 12 for an alternative.

11. Can a parent (or grandparent) loan monies to a minor for mutual fund investment?

A parent (or grandparent) could loan monies to a minor (but repayment of the loan would not be enforceable due to the age of the child). Furthermore, the same restrictions on the minor's access to his/her account will apply. See question 12.

12. What is the most effective way for parents (or grandparents) to gift or loan to their children (or grandchildren)?

The inter vivos family trust is the most effective way because the transaction problems associated with the investment being registered in the name of a minor are avoided and the parents (or grandparents) can control the child's access to the monies by the terms of the trust.

The parent (or grandparent) can settle an irrevocable inter vivos family trust with either a gift or loan of monies, or can transfer their mutual fund shares or units (at Fair Market Value) to the trust. If the disposition of the property does not result in a capital gain (note the $100,000 capital gains exemption has been eliminated effective February 22nd, 1994) or if the transferor has sufficient net capital losses to apply against the taxable capital gain, the transfer of shares at Fair Market Value will not result in the parent (or grandparent) paying any taxes.

The minor is named the income and/or the capital beneficiary. The parents (or grandparents) can be the trustees of the trust to control the allocation and distribution of income. See the Trusts section. The minor attribution rules will apply so long as the parent (or grandparent) is alive, a Canadian resident, or until the year in which the minor reaches age 18 (interest free loans will continue to result in attribution to the donor after beneficiaries reach age 18). Note: See Question 13 for more on minor attribution rules.

13. What are the minor attribution rules?

Future simple income attributes to the parent (or grandparent) until the year in which the minor reaches age 18. Future compound income and capital gains or capital gains dividends do not attribute back to the parent (or grandparent).

These attribution rules will apply even in the case where the parent (or grandparent) has established the irrevocable inter vivos family trust. To ensure that the trustee of the trust knows what attributes and what does not, the Investors One-Plus-One can be established. If the trust assets are to be invested entirely in capital gains/growth funds, the One-Plus-One would not be needed. Only where the investment will generate interest or dividends (simple income) will the One-Plus-One be necessary to track the attributing simple income.

14. How are the accounts established if the parent (grandparent) uses the irrevocable inter vivos family trust?

The accounts can be registered in the name of the trustees for the named trust or beneficiaries by completing Investors Form CL2073 (Declaration for Trust accounts) as outlined in Sales Information Bulletin 4667 (or the trustees can establish the account in their names in trust), attached as Appendix B to Section 11 on Trusts.

15. Has a trust been established for a minor if the parent establishes an "informal" trust by simply registering a mutual fund account in the parent's name (in trust) without having a formal trust document prepared?

At law, a "bare" trust can be estabished without documentation but it is then a question of fact as to what are the terms of the trust. In this example, the parent is treated as the owner of the account and Investors Group will accept the parent's instructions in full. We do not recommend this if the parent is establishing the account for income splitting purposes (where the intent is that only simple income attributes back to the parent until the year in which the child turns 18). The reason is that subsection 75(2) of the Income Tax Act provides that there will be attribution of all income and capital gains back to the settlor of a trust (in this case, the parent) unless the trust is irrevocable, the settlor is not a beneficiary, and the property cannot pass to persons to be determined by the settlor after the creation of the trust. Revenue Canada may demand written evidence of the trust if they are challenging the parent's assertion that the monies really are held in an irrevocable trust for the child. If there is no written evidence to establish the important terms of the trust and Revenue Canada refuses to believe the parent's verbal explanation of the trust terms, all income and capital gains will be attributed back to the parent for income tax purposes.

16. What happens if the parent (or grandparent) dies, having previously established the irrevocable inter vivos family trust?

When the parent (or grandparent) dies, the assets of the trust do not form part of the estate of the deceased so are neither subject to probate nor subject to personal tax. (See the 21-year deemed disposition rule for trusts in the Trust Section - questions 22 and 23). The attribution rules cease upon the parent's (or grandparent's) death.

17. If minors receive an inheritance from a deceased relative, how would a mutual fund or portfolio account be established?

If the deceased dies without a will (intestate), someone would have to apply to the courts to be appointed as the administrator of the estate of the deceased. Generally that person would be a family member or someone with close association to the deceased. In the absence of such person stepping forward then the Public Trustee of the province in question would step into the picture. Generally, the minor would have no access to the monies until he or she reached the age of majority. The inheritance would be held in trust and would be subject to the restrictive trust investment laws. Investors mutual fund shares/units would generally not be an eligible investment and you may not be recognized as investment advisor, in any event, by the court-appointed administrator of the deceased's estate. See the article entitled "Investors Mutual Funds as Qualified Investments for Trusts" in the Sales Bulletin dated June 9, 1995 which is attached as Appendix A to Section 11, which discusses the restrictive trust investment laws.

If the deceased died with a will, and the will indicates that the executor must hold the monies in trust for the minors until they reach the age of majority, the executor would be the trustee who would invest the monies on behalf of the minors. Investors mutual fund shares would be available only if the executor is given (in the will) wide and discretionary powers to invest. If the minor's parents happen to be the co-executors of the estate, then the parents would be the trustees (who could register the account in their names in trust for the minor). If the parents are not the executors, then the person who is the executor would be the trustee who would invest the inheritance.

In the event the executors or trustees paid out a minor's inheritance to someone (for example, the parents of the minor) and that person subsequently spent the money on items that were not "necessities of life" (strictly defined in law) for the minor, the minor might have the ability to sue the executors or trustees.

18. Do inheritances have to be included as taxable income in the recipient's hands in the year they are received?

No.

19. Is it possible to gift mutual fund shares to related adults (like adult children) and/or is it possible to loan/gift monies to a related adult to invest in mutual fund shares?

It is possible to gift mutual fund shares at Fair Market Value to a related adult, like an adult child. The account would be established in the adult child's name and no attribution rules would apply. Likewise, if monies were gifted to an adult child and the child invested the monies in mutual fund shares, no attribution rules would apply. Consequently, there would be no need to set up a One-Plus-One in either situation.

If instead monies are loaned (at no or low interest) to the adult child who invests the monies in mutual fund shares, future simple income would attribute to the transferor. Compound income and capital gains would not attribute. The promissory note found in Chapter 10 of the Tax Library is an example of documentation used to establish a loan. The One-Plus-One (with both the host account and the second account in the name of the adult child) could be used to track any simple income that attributes. Chapter 10 of the Tax Library provides more details on this topic.

If the person who made the gift or loan dies or ceases to be a Canadian resident, the attribution rules would cease to apply.

If the will of the person who made the loan provides that the loan to the adult child shall be forgiven upon death, the loan principal would not have to be included in the estate for probate purposes. Whether or not any loan is forgivable, there would be no deemed disposition of the shares in the deceased's hands because the adult child is the owner of the shares at the time of death.

20. What chapters of the tax library discuss gifts and loans and the attribution rules?

Chapter 10, Income Splitting and Attribution.