Looking to give major gifts of property or investment assets to
family members? The good news is that unlike the U.S., Canada does
not have a gift tax on transfers of money or property to your
family. But you're not getting off unscathed.
There are a variety of other tax rules that can be
triggered by a gift to your spouse or kids. Here's what to
Obviously tax rules related to gifts would not apply to typical
gifts such as a sweater or an iPhone. But it gets tricky when you
want to give, say, the cottage to your kids, or a large amount of
cash to family members so they can invest on their own.
Subject to certain exceptions, the tax rules have two main
purposes: 1) to ensure that the Canada Revenue Agency collects the
tax on any accrued gain; and 2) to prevent "abusive"
income-splitting transactions among related persons.
Where you transfer property to a family member (i.e., any
non-arm's length person) for consideration less than fair
market value, your "deemed proceeds" will be adjusted
upward to the fair market value of the transferred property. This
may not mean much if the fair market value of the property is not
more than the cost of the property to you (i.e., if you gift a used
car to your kids, chances are that the fair market value of the car
has not gone up).
However if the property has increased in value since you
acquired it, you will have to pay a capital gains tax on the gift
equal to the increase in value. The silver lining (however thin) is
that if you transfer the property by way of gifting it to a loved
one, the cost of the property to them will also be adjusted upward
so that the tax hit is only to you, the "giftor."
Transfers of property to a spouse
There is an exception to these rules for gifts to a spouse. In
the usual case, and subject to the comments below, a transfer of a
property to a spouse will automatically occur on a tax-free
rollover basis, unless you elect otherwise (i.e., you are deemed to
have transferred the property at your cost to your spouse, so there
is deemed to be no capital gain).
Note, though, that this also applies to any property that is
transferred to a former spouse as a result of a settlement upon
marriage breakdown. However, this spousal rollover applies only
where both spouses are Canadian residents at the time of the
transfer. But the net effect is that you, as the giftor, do not get
hit with a deemed capital gain.
When the attribution rules kick in
Even though you may gift property to a spouse basically tax
free, the attribution rules can still sneak up on you if that gift
creates income (and that includes gifts made to a minor child).
Specifically, any income arising from the gifted property will be
included inyour income.
The attribution rules will also kick in for a loan or incurred
indebtedness on a transfer of property, unless the prescribed rate
of interest (currently 1%) is charged and paid for each year the
loan is outstanding.
But, wait, there's more! Any capital gain realized on a sale
or other disposition by your spouse will also be
attributable to you. So even if you can transfer a property to your
spouse tax-free, when she or he sells it, the capital gain –
if any – will again be taxed in your hands. Happily, though,
this rule relating to capital gains does not apply to your
minor-age children. Which means you should be able to legitimately
split capital gains with your kids.
So what's the point of gifting to your kids or spouse if
you're not going to get any tax benefits? For starters,
there's love and gratitude (one hopes!). But here are a few
planning points to consider as you weigh up your options:
The non-resident gambit. There is no
attribution where the property is received from a non-resident
(i.e., this is of use if your kids have grandparents who spend a
majority of their time in, say, Florida or some other sunny place
The low-yield manoeuvre. It's a good
idea to gift investments with low current yield but high capital
gain potential to your kids. Even though the income may be
attributed to you, the capital gain will be taxed to your kids and
subject to their (lower) tax rates.
An account of their own. "Child tax
benefits" accumulated directly in segregated bank accounts for
the benefit of your children are considered funds of the child
rather than the parent.
Transfers to adult children
Transfers to adult children (18 years of age or older) can be
made without the attribution rules kicking in, so that the income
will be taxable to your them, not you. (But beware of the rule
regarding inadequate consideration, which I mentioned above.)
Next time: Transferring the principal residence
and the trap of joint liability.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).