There are very few things in life that are truly tax-free. In Canada, gifts to family members, however, technically qualify as tax-free transactions. This does not mean they are entirely free from tax implications, however, Below, we will review the tax obligations that can be triggered when gifting money or assets to a family member, and provide tips on how to structure a gift to minimize those obligations.
During these COVID 19 times, parents are thinking of ways to support their children and gifts are a good action plan to consider. The good news is that these gifts do not have to be included in the taxable income of the receiving family member(s). Many Canadian parents have done this to help children buy a house, start a business or get married. In contrast, parents in the U.S. who provide gifts to their children can face tax consequences if certain limits are exceeded.
Once you decide to give a gift to your child, however, the next question is how much should you give, what form should your gift take and what tax, and in some cases, family law considerations and opportunities are associated with making a gift.
What Form Should the Gift Take?
The easiest gift to give is cash and this is what most parents do. You may also want to consider making a gift of property “in-kind”, such as a gift of securities that would be transferred from your portfolio to theirs. You could also consider a gift of real property, such as the family cottage.
You need to be careful that your gift amount is not so excessive that it leaves you with insufficient funds for your own retirement. Canada generally has no rules limiting how much you can give, either in your lifetime or upon death. While you can give as much as you wish, be sure to only give only amounts that you are certain you won’t need to support your own lifestyle and goals. In the U.S., there are annual limits and lifetime limits.
There are two main types of gifts: “inter-vivos” gifts, meaning gifts made during your lifetime, or “testamentary” gifts which are given upon death through a Will. By making gifts during your lifetime, you will have the benefit of seeing your beneficiaries enjoy your gifts and there may even be opportunities for tax savings.
Tax Implications of Gifts in Canada
A poll conducted by CIBC a few years ago found that many Canadians were confused about the taxes associated with making a gift, with over half admitting they simply didn’t know what taxes exist on a financial gift to a child or relative, while nearly 10 percent believed that the gifts were potentially taxable to the recipient.
While the receiving of gifts is tax-free, there still can be tax consequences. There will be a deemed disposition on a gift of assets “in-kind” such as appreciated securities or real estate. A ‘deemed disposition’ means that the government will treat the gift as though it was sold, even though no such transaction took place. This means that you, the giftor, will pay tax on 50% of the capital gains of what you would have ‘earned’ through the sale.
There are some exceptions to this rule. For example, if you make an in-kind gift to your spouse or common-law partner, there is an automatic “rollover” of the property’s tax cost or adjusted cost base (ACB). This provides a deferral of tax on any accrued capital gain to the date of the gift, although, under the spousal attribution rule to prevent income splitting, you will pay tax on any capital gain when the property is ultimately sold by your spouse or common-law partner. You will also continue to be responsible for the tax on any future income earned on the gifted property.
While your family members who receive the gift are not required to pay tax on the gifted amount, there is an overall favourable tax consequence for the family. The gift recipient will pay tax on future income earned on the gifted amount. If your marginal tax rate (the tax on your next dollar of taxable income) is 50% and your child’s is 20%, the income from the gift is taxed at a lower rate.
Gifts Can Reduce Estate Taxes
Gifting may also save you some taxes upon death, as most provinces levy an estate administration tax or probate fee of up to 1.7 percent of the assets in your estate (depending on your province). This tax has the effect of decreasing the amount of the estate that will eventually be distributed to your beneficiaries. By gifting assets before you die, these assets will not be subject to probate fees because they will not form part of your estate.
If after reading this information on gift tax, you are looking for advice on how to maximize the impact of gifts to your family, please contact the Chartered Professional Accountants at ESS CPAs LLP by calling 905-517-2297 or by contacting us online. Their consulting expertise will help you make the best decision for you and your family.