General Tax Rules Regarding Gifts
Canada does not have a gift tax in the sense that giving a gift will not immediately give rise to tax. Many gifts can be given tax-free. Nonetheless, giving or receiving a gift can still result in taxable income on which taxes will be paid in certain circumstances which will be discussed in further detail below. A gift generally does not need to be given for particular special occasions to be tax-free.
Capital Property as Gifts
Capital Property is property that when sold could give rise to a capital gain or loss when sold. There is a wide range of assets the disposition of which may qualify as capital gains, depending on the exact circumstances, including:
- Land and buildings
- Patents and trademarks
When a taxpayer transfers capital property to a recipient who is not arm's length from the taxpayer for less than fair market value consideration, certain deeming rules are applied to adjust the value of the property for tax purposes. The taxpayer who gifts the property is deemed to have disposed of the property at fair market value. This could potentially trigger a capital gain for the gifting taxpayer, unless the transfer is to the gifting taxpayer's spouse or common-law partner. However, if a loss results (i.e. the fair market value of the property when it is gifted is less than the value when the property was acquired), the gifting taxpayer will likely be barred from claiming a capital loss by either the superficial loss or stop-loss rules. The deeming rules do not apply to the recipient of the gift, who is generally considered to have received the gift for value of the consideration given to the gift giver, which is normally nil. This could trigger a large capital gain for the recipient when disposing of the gift.
Gifts from Employers
Gifts received from your employer are considered a taxable benefit to the employee and must be reported as part of the employee's income. However, as a general practice, the Canada Revenue Agency will not require you to report certain non-cash gifts and awards. The employee only needs to report the portion of non-cash gifts and awards where the value of non-cash gifts and awards received from the employer exceeds $500 for the year. Where the value of the non-cash gifts and awards exceeds $500, the employee reports the portion of the value which exceeds $500. The employee can exclude non-cash gifts and awards of trivial value, such a branded pen, from the calculation of the $500 total gift and award value. The Canada Revenue Agency is defining a gift as something received for a special occasion, such as a birthday, for the purposes of this administrative policy. Cash and near-cash gifts must always be reported.
Gifts from Taxpayers with Unpaid Taxes - Section 160
Section 160 of the Income Tax Act assumes taxpayers who owe money to the Canada Revenue Agency may use gifts to prevent their assets from being seized by the Canada Revenue Agency's Collections Department in lieu of unremitted taxes. A section 160 assessment therefore arises where a taxpayer who owes taxes to the Canada Revenue Agency transfers an asset to another person (the "gift recipient") for less than fair market value consideration. These assessments are derivative assessments meaning the gift recipient, not the taxpayer, will be assessed under section 160. The value of the assessment will be the lesser of
- The taxpayer's unpaid taxes
- The difference between the fair market value of the asset and the value of any consideration received by the taxpayer from the gift recipient for the asset.
Gifts and Tax Credits
Gifts given to specific entities and certain kinds of gifts can result in tax credits for the gift giver. The tax credit will be limited to the eligible amount of the donation. A tax credit is given on gifts to the governments of Canada, the provinces and territories, or to qualified donees. Qualified donees include registered charities, registered municipalities in Canada and the United Nations. Donations of ecologically sensitive land and certified cultural property can also result in tax credits for the donor.
Pro Tax Tips - Paper Your Transactions
The Canada Revenue Agency takes notice of a taxpayer suddenly receiving assets on which no taxes are paid. In an attempt to collect taxes on these amounts, the Canada Revenue Agency often attempts to portray the transaction under which the taxpayer received the assets as a taxable transaction. How does a taxpayer prove to the Canada Revenue Agency that these assets were received as a gift and she was correct to pay no taxes on receipt of these assets?
The easiest way to prove the nature and existence of the gift to the Canada Revenue Agency would be creating a paper record of the gifting transaction known as a deed of gift at the time that the gift is made. The benefits of creating a paper record for transactions apply to other transactions besides gifts. Taxpayers should consult with one of our expert Canadian tax lawyers to learn the benefits and best method for papering their transactions.
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.