Parents often help out their adult children by giving them money, which is why they should know that the money could end up in the wrong hands in a marriage breakup. Nicole Ewing, VP, Business Succession Advisor and Tax and Estate Planner, TD Wealth, tells Kim Parlee a cautionary tale on how family payments could go astray and what to do to avoid unintended consequences.
You love your adult children. And as a parent, you would give them money and support them through life. But what could go wrong? Well, that money may end up where you don't want it to. Let's say your kids are going through an acrimonious divorce and the money ends up with your child's former spouse. Here to tell us some ways to prevent that from happening is Nicole Ewing. She's vice president and tax and estate planner with TD Wealth.
We've talked about this before, but the importance with gifts and loans and making sure they're well documented, can you refresh us just on what needs to be done?
Sure. So it really makes a big difference whether or not the money that comes from a parent is a loan or whether it's a gift, whether you're already married or whether you become married during the time that you receive that money, whether or not you're going to have to share those funds if there's a breakdown in the marriage. So if it's a loan, no, you don't have to share those funds. It was a loan. They'll be paid back.
If it's a gift and you commingle it, it has to be shared. If you don't commingle it, it can be protected. So it really, really matters what the intention of that gift is, how it's documented, and what you're able to demonstrate if there's a breakdown in the marriage in terms of what you're going to have to share.
Really, the best way to show this is examples.
And you always have lots of examples. So you you've got here-- you're going to tell us about a court case that you want to talk about just to prove how important that documentation intent is.
So relatively recently there was a court of appeal decision out of Ontario that made it very clear that sometimes those gifts that are made from the parents can actually be included in the income of the child in determining what support obligations they're going to have. And this came as a bit of a surprise. There's federal guidelines with respect to child support and there's provincial lay-ons on top of that.
But very generally, an individual is required to pay child support based on their income. And so in this case, they'd been married for over 20 years. They had two children. And there was a breakdown in the marriage, and it was a question of what the husband's income was. And so, of course, his employment income was included in that, but the wife was suggesting that the gifts that he had received from his mom during the course of their marriage established a pattern of income, an expectation of income. And so he received generous and continuous gifts of money and dividends issued out of his mother's corporation. And so her argument was those should be what's called imputed income, income that is added on to taxable income that has been used to sustain the lifestyle. And so the court of appeal--
The children's lifestyle.
The children's lifestyle-- the family's lifestyle, ultimately. And so it was determined in that case, both at the lower level and at the court of appeal, that yes, those gifts that had been received from mom to the husband formed a part of his income. And now they weren't suggesting-- the argument from his is that you're essentially shifting the child-support obligation to my mother now. And the court said, no, there's no ongoing obligation for the parents to continue to make those gifts, but it is a reality that they have been made and that they are likely to be made in the future. If the parents were to stop making those gifts--
Then you would revisit that.
--revisit it. But they were included for the purposes of determining the level of child support that needed to be paid.
Could that have been avoided had different, again, paperwork been in place?
Well, I was thinking about, why were the gifts made to the husband in the first place? And usually when the gifts are made to the husband, we're doing that to protect those assets in the event of a breakdown of a relationship. And so in this instance, though, they were being commingled. He was using those funds for the benefit of the family anyways. They weren't being preserved and having income earned on that he would need to protect. And so it was already being spent. So perhaps in that case maybe the gifts should have been made to both of them and now the spouse would have had an equal amount of income that had been imputed to her.
Who knows how that would have actually turned out? But it shows that we need some creative thinking and we need to think about what the actual intent is. If it had been a loan, of course, that was properly documented that the husband kept separate and used that income to help pay, then that may have avoided the result. But the critical element, I think, is that this just sort of all happened, that the parents made the gifts, and it was used, and we never really thought about it until after the fact, and we had to determine after the fact what the nature of these funds were.
And so had some thought gone into it, and what are we trying to achieve here? Maybe the grandparents are simply going to pay for certain-- we're going to pay for hockey. That's our gift.
They could have done that.
We're going to pay for-- exactly, without having income attributed to the husband.
And it gets more complicated, of course, when there are probably more significant funds involved, which is, I would expect--
The case here.
--in this Case, yeah it was. So I guess bottom line when somebody hears this, what do they need to do make sure without, I guess, also burying themselves in paperwork at the same time?
Your professional advisors have experience in this, whether it's your lawyer, your accountant, your tax advisor. They are aware of these sorts of issues. And that's really the key is that this is issue identification. We don't know what's going to be appropriate for any individual in their particular circumstances. But if they identify that there's a risk to them that something might go a way that they don't intend, they should just reach out and ask for that expertise and develop a plan, make sure it's appropriately documented, and then we all move forward as though nothing's ever going to go wrong.
Which is what we hope.
Nicole, thanks very much.
It's a pleasure.