With only days left before Christmas and the New Year, many holiday shoppers may be wondering besides sales tax or GST / HST, what other possible taxes could apply to their holiday celebrations? In this short post, we will address some of your questions as to how the US Internal Revenue Service ("IRS") and the Canada Revenue Agency ("CRA") may ruin your holiday parties.
Gifts for US Persons
If you're a US person, each gift you give has a cash value that depletes an annual exclusion amount. For each person to whom you give a gift, you have an annual limit on the value of gifts you can make before the gift itself becomes taxable. For gifts with a tax basis, generally the recipient of the gift also receives the gift giver's cost basis.
If any gift to any one person or organization exceeds the annual exclusion amount in a given year, the excess is taxable and reported on a gift tax return, which in turn reduces each individual's "lifetime unified tax credit," which in turn reduces the amount excluded from both estate and gift taxes. Once an individual has depleted his or her lifetime unified tax credit, any further amounts will subject that individual to estate and gift tax, which currently has a top marginal rate of 40 percent and would remain at this top rate after 2025.
For 2020, the lifetime gift tax exclusion is US$11.58 million, which increases to US$11.7 million in 2021. (These amounts are set to reduce to US$5 million, indexed for inflation, after 2025 unless otherwise extended.) Each person has his or her own annual exclusion for each recipient, currently US$15,000 for 2020 and 2021.
Married couples can accordingly each give up to the annual exclusion amount to one child without any gift tax consequence. There are several exceptions of gifts that are not subject to gift tax or affected by the annual exclusion:
- Gifts to qualified charities, such as 501(c)(3) organizations;
- Payments covering tuition made directly to a qualified educational institution on behalf of a student are not considered gifts, but this may have an adverse effect on student loan eligibility. Payment for other expenses, other than tuition, are not covered by the exception;
- Payments made directly to a qualified medical institution or care provider on behalf of another, or payments made directly to pay for health insurance; and
- Payment or gift of other property to a "political organization" for the use of the organization.
Another exception for the annual exclusion is for US citizen or resident married couples. Gifts or other transfers of property between US spouses do not trigger any gain or loss and are treated as if made by gift, which is given an unlimited deduction against the gift tax. For married couples where one spouse is a US citizen or resident and the other spouse is not, gifts can trigger a gift tax consequence, and sales or exchanges may be taxable. The one benefit for making gifts to a non-US spouse is that the annual exclusion amount is increased from the current US$15,000 to US$157,000. From a US perspective, there is no issue if the US spouse receives a gift from the non-US spouse, but there may be tax implications for the non-US spouse's country of residence.
The CARES Act has made several changes that provide an opportunity for larger charitable deductions.
For individuals who do not itemize their deductions on Schedule A, beginning with the 2020 tax year, the CARES Act introduced up to a US$300 above-the-line deduction for calculating adjusted gross income for charitable contributions to qualified organizations. For individuals who itemize their deductions, for 2020 the CARES Act increases the individual's charitable base limitation on charitable cash gifts from 60 percent for most organizations to 100 percent.
Generally, corporations are limited to 10 percent of the corporation's taxable income, taking into consideration certain adjustments. For the 2020 tax year, this limitation is increased to 25 percent. For donations of food inventory from any trade or business the normal 15 percent limitation is increased to 25 percent for 2020.
Gifts to individuals
In general, at least from a tax perspective, gifting for Canadians is simpler than for our American friends, but there are still some potential lumps of tax coal that you need to be aware of. In general, if you give someone a gift then you will create a disposition of property at fair market value ("FMV"), so any gains that accrued prior to that disposition would be recognized and taxable at the time of the gift – likely as a capital gain. If the disposition resulted in a loss (since the FMV of the gifted property was lower than the adjusted cost base), then you need to be aware that the Canadian tax rules contain a myriad of "stop-loss" rules that may prevent such a loss from being claimable. Such "stop-loss" rules are beyond the scope of this short article.
If your gift is to a related minor, for example your offspring or niece or nephew, then even if the gift is made indirectly – for example through a trust – any income earned from the gifted property will be attributed back to you and taxed in your hands. Perhaps more in the Christmas spirit however is the rule which allows further income earned from the gift that resulted from a re-investment to escape attribution back to you. Additionally, there is generally an exemption for any capital gains in respect of the property gifted, meaning a capital gain should be taxed only in the minor's hands, rather than yours.
Similarly, if you directly or indirectly transfer property or cash to your spouse or common-law partner then both the income / loss, and any capital gains or capital losses resulting from that property will generally be attributed back to you and taxed in your hands. Some spouses try to get around this by using joint investment accounts, however in that case the income / loss or capital gains / capital losses from the account should be allocated to each spouse based on their respective contributions to the account.
There are some notable exceptions to the attribution rules:
- When your gift takes the form of a contribution to your spouse or common-law partner's Tax Free Savings Account ("TFSA"). In that case, at least for the time that the gift is held by the TFSA there will be no attribution back to you, provided there is adequate contribution room in their TFSA.
- When you make a spousal contribution to a Registered Retirement Savings Plan ("RRSP"), to the extent that the contribution is deductible in computing the contributor's income, provided the contribution is not withdrawn for at least three years;
- There will be no attribution of income back to you where the "gift" is in fact a loan, and interest that is equal to or greater than the prescribed interest rate set out in the income tax regulations is charged in respect of that loan, and the interest is paid by January 30 of the following calendar year each year. These types of arrangements are commonly called "prescribed rate loans" and our firm recently did a podcast on this that you can listen to here; and
- In most cases, pension income splitting is another exception to the attribution rules.
In addition to that warm glow, you get when making a charitable gift, a donation tax credit is available in respect of gifts to a registered charity can be quite helpful at tax time. At the federal level your credit will be 15 percent of the first $200 of donations, and 29 percent of your additional donations, going up to 33 percent if you are in the highest income tax bracket. The provinces all have similar credits, ranging from 4 percent to 24 percent. Note however that these credits are non-refundable, meaning you have to claim any other credits you may be entitled to first, and then can apply your donation tax credits, but only to the extent that you still have taxable income, and provided that your total donations have not exceeded 75 percent of your net income. From an administrative perspective, the CRA will enable charitable donations to be transferred to your spouse, meaning in some cases you can pool donations in order to get above the $200 threshold, or accumulate the donations for up to five years and claim them all together in the same year.
In general, we recommend that you confirm on the CRA website whether an entity is in fact a registered charity, and confirm at the time your gift is made that a charitable tax receipt will be issued to you.
For Canadians who have US income and who may wish to make a gift to a US charity, you can do this if the charity meets the following conditions:
- it is generally exempt from US tax; and
- it could qualify in Canada as a registered charity if it were a resident of Canada and created or established in Canada.
If these conditions are met then you should qualify for deductible tax credits up to 75% of the net US income reported on your Canadian return; however, unless the gift is to one of the Universities which are listed in the Canadian Income Tax Act, the technical requirement is whether the organization meets the common law test to be a "charity". In some limited cases it is possible to claim an eligible gift to certain US organizations for up to 75% of your net world income, rather than your US income. This may apply, for example, where the gift is to a US college or university at which you or a member of your family is or was enrolled in, or if your gift is to one of the approved US universities on the CRA's list of qualified donees.
Political contributions made to a registered political party or a candidate result in a 75 percent credit in respect of your first $400 donation, 50 percent for amounts between $400 and $750, and 33 percent for amounts over $750. The maximum contribution you can claim is $1,275, which will create a $650 credit.
Additionally, the provinces also allow for political contribution tax credits. For example, in Alberta you could claim a provincial tax credit if you donated to an Alberta political party, or a candidate.
Gifts from Employers
A gift that an employer gives an employee is generally a taxable benefit from employment, whether it is cash, near-cash, or non-cash; but it turns out the CRA isn't completely the Grinch as they have an administrative policy that exempts non-cash gifts in some cases. For example, if an employer's Christmas gift to their employee was a voucher for a Christmas goose with a set value at a specified grocery store, and no substitutions were possible, CRA is likely to say that this non-cash gift is not a taxable benefit.
In contrast, however, cash and near-cash gifts are considered additional renumeration to an employee and will always be treated as a taxable benefit to the employee. So, for example, if the same employer instead gave their employee a gift certificate for a department store that allowed the employee to choose what they wanted to buy and when, this is likely to be a taxable benefit. In general, anything which is a near-cash gift from an employer, or is easily converted to cash, for example gift certificates, securities, or stocks, will be treated like remunerations and be at taxable benefit.
And so, to you we wish you happy gifting, happy holidays and Merry Christmas!
Moodys Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.
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.