The largest intergenerational wealth transfer in Canadian history

A new study

July 13, 2017

In a recent edition of the Financial Post (June 6, 2016) Garry Marr reported that a new study from CIBC Economics suggests Canadians can expect a $750 billion windfall from their aging relatives over the next decade, an inheritance inflated 50% compared to what was passed on in the previous decade.

Author of the report and a leading Canadian economist, Benjamin Tal, was quoted in the Financial Post article as observing that this is the largest intergenerational wealth transfer in Canadian history for the time considered and the amount will grow even larger in subsequent decades.

People on receiving end are aged 50 – 75

In his report, Mr. Tal noted there are about 2.5 million Canadians over age 75, close to 45%of them widowed. The number of Canadians 75 and older has jumped 25% from a decade ago and the figure is expected to continue increasing.

‘Canadians are living longer with mortality rates among the elderly falling steadily, but the demographic picture still suggests that in absolute terms more Canadians over the age of 75 will pass away in the coming decade,’ observes Mr. Tal, in the report.

This new cohort among the age is not only the largest on record but also the wealthiest, with their net worth rising 30% between 2005 and 2012, after being adjusted for inflation. Mr. Tal estimates the current net worth of the cohort at $900 billion.

The people on the ‘receiving end’ of that wealth are Canadians aged 50 to 75 and that will help improve their debt picture as their ratio of assets to debts has recovered strongly in recent years.

‘The distribution, though, is highly abnormal — there is a lot of money going to people who already have money,’ Mr. Tal reported. He looked at inheritances people had already received to look into the future and found that just over half of Canadians aged 50 to 75 had received an inheritance averaging $180,000 with the largest in British Columbia — which he credited to elevated real estate prices in the province.

Once you get past B.C., Ontario and Quebec, the average inheritance was less than $100,000 over the past decade for those 50 to 75. (Those inheritance numbers were pulled from an online Angus Reid survey conducted April 26-27, 2016 of 1,003 panelists ages 50 to 75 who have received an inheritance, and is considered accurate to within 3.1 percentage points, 19 times out of 20.)

Wealth inequality to be magnified

Tal said the distribution of inheritance is ‘abnormal,’ with the average inheritance for those making $100,000 or more almost three times higher than lower-income Canadians. The average inheritance for Canadians has been almost four times higher than the median income over the last 10 years.

‘The larger proportion of the looming bequest boom that is expected to go to high-income Canadians suggests that income inequality will be further transformed into wealth inequality,’ suggests Mr. Tal, noting that 40% of high-income individuals suggested they saved or invested their inheritance while a larger proportion of low-income Canadians are likely to use it for daily expenses.

Impact on real estate values

Some older Canadians are passing on their wealth within their lifetime, and some of it is already responsible for elevated housing prices and will continue to keep prices high. Said Mr. Tal: ‘It will pay for down payments, for renovations.”

Mr. Tal suggests the impact on real estate markets will be gradual and, in some cities like Vancouver and Toronto, might increase the supply of low-rise properties.

‘Given elevated real estate values, it’s reasonable to expect that a large proportion of projected inheritance will be transferred as inter-vivos gifts — a factor that might have positive impact on homeownership rates among younger Canadians and would probably increase overall spending on renovations,’ Mr. Tal concluded.

Geoff Funke, Senior Wealth Advisor, Scotia Wealth Management, 604.535.4721.