Personal Loans

There are some important aspects that a person needs to take into consideration when gifting and lending money to family members, especially children.

• A person can “freeze” their estate when they loan money. The lender basically loans the growth of an asset to someone else. Any growth that results is not taxable on the lender, with some exceptions. 
• If a person’s child purchases an asset from them and the seller “take[s] back a loan as consideration for all or part of the sale price,” then the seller will incur no negative tax consequences. However, if the asset appreciates in value then the seller could incur a capital gains tax. 
• For tax purposes, any income earned from property, such as rent, is not attributable back to the lender, unless the lender loaned the money to a minor.
• If the lender is a U.S. citizen or an equivalent, then that person is subject to our federal gift and estate tax rules. 
• If a person is an non-U.S. citizen (Canadian citizen) but his or her child lives within the U.S. then Section 274(2) of the Canadian tax code could apply to these types of loans.
• Canadian law states that indirect loans (loans made to person so that person can lend the money to another person, such as a child) are acknowledge to be made by original lender who loaned the money. 
• Repayment of a loan by a child to their parent generally is not taxable; however, any amount in excess what the child has to pay is considered taxable interest on the loan.
• If a persons wants to lend money to a minor child, then that person must establish a trust for the child.

See Tim Cestnick, Tips and Traps When Tapping the Bank of Mom and Dad, Globe and Mail, May 23, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.