“Soft” Loans for Your Children
Parents quite often make loans to their adult children to help them purchase a car, a home, or for other reasons. A loan is different from a gift. The parent can charge interest so that the loan will earn some investment income. The loan can be set up for blended payments of principal and interest or to pay interest only. There is no requirement for the parent to charge interest.
For a long term loan used to purchase a house, for example, it is quite possible that the loan will not be repaid during the parent’s lifetime. The parent could provide in her or his will that any remaining balance of the loan will be forgiven or instead become part of the child’s inheritance. Such an arrangement does not cause any adverse tax consequences because the “debt forgiveness” rules in the Income Tax Act do not apply to the settlement of loans by inheritance or bequest.
Giving your child this type of “soft” loan is similar to giving them a part of their inheritance early, during your lifetime.