Over the past several weeks, we have been talking to clients about the differences between reacting to headlines and changing investment tactics based on real fundamentals. Sentiment has definitely been in flux, with moods shifting between geopolitical concern to disbelief in how equity markets could possibly be doing as well as they have this year. Surprisingly, we are almost through the month of May, and I haven’t heard the usual parade of “sell in May and go away” mentions.  We will take a deep dive on what Ally and I are looking out for on the macro side of things, but that is going to be next week. For today, I wanted to hit pause and leave time for a discussion of a couple of questions that have come up in recent conversations, namely “what do I do with my tax refund?” and “how can I help my children achieve home ownership status in a housing market that remains out of reach for so many?” 

The Tax Refund: Found Money or a Strategic Asset?

So, the CRA just deposited your refund. Now what? It’s tempting to treat a tax refund like found money—a bonus to be blown on a summer toy. In behaviour finance, this is known as the “windfall effect”. But let’s remember what it actually is: your own capital finally being returned to you. But now that Ottawa has been so kind as to return to you your own money, here is the hierarchy of how to deploy it.

Debt Demolition: Earning a guaranteed, tax-free return of 18-20% by wiping out a credit card balance beats any equity pitch you'll hear on the tee box. Furthermore, there has been a sea change in expectations with respect to where interest rates are heading. Just five months ago the market believed we would see another two or three rate cuts by the Bank of Canada this year. Higher inflation, thanks to the Iran war, has quieted that call.

The RRSP Snowball: Want to guarantee a head start on next year? Drop that refund straight into your RRSP. You immediately lower your taxable income for the current year, letting your tax efficiency compound. Now, this will depend on how large your RRSP already is and whether there is a risk of getting caught in a situation down the road where your income is higher in retirement than it is today. Don’t worry though. Your accountant has recovered from tax season and probably hasn’t gone on vacation yet, so give them a call for advice.

The TFSA Top-Up: If the RRSP doesn't fit your current tax bracket, or if you are going to already reach your maximum contribution in 2026, funneling that cash into a TFSA ensures every dollar of future growth is entirely yours, shielded completely from the CRA.

The Bank of Mom and Dad: Getting the Down Payment Right

We’re witnessing a massive wealth transfer in real estate, with parents stepping in to help adult kids either break into the housing market or help lessen the burden of a massive mortgage. Gifting money to your children (or grandchildren) is a wonderful thing to do, provided you do it right. The first question we typically get is whether there is going to be a tax consequence for the parents or the children receiving the gift. The good news is that, unlike the U.S., Canada does not have a gift tax. In terms of other considerations, let’s differentiate between helping with a down payment on a new home and simply offering up some cash to reduce a mortgage.

If you’re planning to gift funds for a down payment, there are strict rules of engagement.

The Lender’s Golden Rule: Mortgage lenders don't like mysteries. If you’re providing funds, you will need to sign a formal "gift letter" explicitly stating the money does not need to be repaid. If it’s a loan, lenders factor it into the kid's debt-service ratios, which can torpedo the mortgage approval. Also, because of anti-money laundering rules, lenders typically want to see those gifted funds sitting cleanly in the buyer’s account for at least 15 to 30 days before closing. Bottom line, it pays to plan ahead. If a home purchase is in the cards, it is better to get those funds in their hands well before the trigger is pulled.
 

The FHSA Power Play: You can’t open a First Home Savings Account (FHSA) for your child. You can, however, gift them up to the $8,000 annual limit so they can make the contribution themselves. They score the tax deduction, and the capital grows tax-free for the house.

If all you are doing is helping to reduce your child’s mortgage, the only real consideration is protecting the capital. What do I mean about this? It’s the conversation nobody wants to have, but if your child is married, then the home is a family asset. If the relationship goes sideways, that asset value is going to be split. However, it’s not the gross assets that get divided, but the net assets. This means that debts and/or liabilities are subtracted first before the pie gets carved up. If there is a mortgage on the home, it is netted out. And, if each partner has debt related to the family assets, it is also gets subtracted from the asset column.

Some parents will offer a loan or mortgage with a lower interest rate than what their child might pay at a financial institution, but others will not want any interest. Furthermore, many will simply structure it as a forgivable loan, meaning that if the parent(s) pass away, the loan does not have to be repaid. If, however, the relationship does break down then this approach protects the family wealth that is intended for the next generation. It goes without saying that decisions like those above should be discussed not only with your wealth advisor, but with your tax and legal professionals.

We are not far from saying hello to summer, but it isn’t too late to do some spring cleaning and address those planning issues that might have been put on the backburner while watching the relentless market headlines. Don’t worry though. We will address that next week.

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.     

Andrew Pyle