June 1998

The Many Benefits
of “Appearing” Poor

© Talbot Stevens

Let me share a little known strategy that is used now, which I guarantee will become more popular in the future.

One of the first things that wealthy people do when they finally get into the top tax bracket, is to immediately try to find ways to get back down in the low tax bracket!

Naturally, they don't want to actually be poorer, they just want to “appear” poorer, and in the process, reduce their tax burden.

One of the simplest ways that anyone can “appear” poorer is by gifting early, instead of through your estate. This concept can be extremely beneficial to seniors, especially those with abundant income to meet their needs.

Consider the retired couple that has planned and invested well to create more than enough income for the rest of their lives. They know that a large portion of their investments will go to their kids when they pass away.

Instead of gifting the investments to the kids through the estate, let's examine the benefits of gifting the money now. (In my public seminars, this is usually where all adult children really start paying attention!)

If you had an extra $100,000 of GICs and you gifted it to your adult child, how much tax would be due on this transaction? None. Currently, there are no gift taxes in Canada. Since the money is outside of an RRSP, and no capital gains were triggered, there are no income taxes either.

If the money had passed through the estate, it would have faced estate taxes, like probate fees, which most people expect will increase in future. Gifting early reduces probate fees.

Gifting investments also reduces retirement income which could result in increased Old Age Security (OAS) income, and other income tested benefits. And it can get better.

If you gifted to a trusted adult child, and they paid down their mortgage, they would have more disposable income available. Consider the theoretical possibility that the adult child actually appreciated the gift. Then the child could gift back to the parents a monthly payment of appreciation. Note that I did not say this would happen!

If the payment is a gift or repayment of an interest-free loan, the parents receive this cashflow totally tax free. And because it is not taxable income, this cashflow does not increase the clawback of government benefits like OAS, or Seniors Benefit in the future.

Although the government might not like the results, gifting to, and possibly from, an adult child is a simple, perfectly legal way to reduce estate taxes, appear poorer to possibly receive more government benefits, and maybe even create retirement income that is tax and clawback free.

The concept of gifting early to “appear” poorer will be more important when the Seniors Benefit comes into effect, because benefits are clawed back at a much lower income level than the current OAS system.

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