Family gifting is a meaningful way to support loved ones, whether it’s helping a child with a home down payment, contributing to a grandchild’s education, or transferring cherished assets. However, these acts of generosity can come with complex tax implications in Canada. Understanding these rules is essential to avoid unintended tax burdens while maximizing the benefits of your gifts. This article outlines key tax considerations for family gifting in Canada to help you make informed and strategic decisions.
Understanding What Constitutes a Gift
A gift is a voluntary transfer of property, money, or assets without expecting equal value in return or the continued entitlement to the income of the property. This can include cash, real estate, stocks, or personal property. For tax purposes, gifts are assessed at their fair market value (FMV), which determines potential tax liabilities
Gift Tax in Canada
Canada does not impose a gift tax on cash gifts to family members. You can give any amount of cash to a family member without worrying about a gift tax. However, if you’re gifting to a minor child, any income earned from that gift may be attributed back to you for tax purposes. Whereas capital gains realized from the gifted funds are generally taxed in the child’s hands, which can provide some tax advantages.
These attribution rules are tax laws designed to prevent individuals from avoiding taxes by transferring income-earning assets to family members in lower tax brackets.
Capital Gains Tax Implications
When you gift property other than cash, such as real estate, stocks, or other investments, the Canada Revenue Agency (CRA) considers you to have sold the property at its fair market value at the time of the gift. This is known as a deemed disposition. As a result, you may have to report any capital gains on your tax return for that year. Similarly, the recipient is deemed to have acquired the property at that fair market value, meaning that the value becomes their cost base.
Capital gains tax is owed on the increase in value of the property from the time you acquired it to the time you gifted it. Currently, in Canada, 50 per cent of capital gains are included in your taxable income. This can result in a significant tax liability, especially for properties that have appreciated substantially over time.
Gifting to Spouses
Transferring assets to your spouse or common-law partner can often be done without immediate tax consequences, thanks to the spousal rollover provisions in the Canadian tax system. This means you can transfer property to your spouse at its adjusted cost base (ACB), deferring any capital gains until the property is ultimately sold.
However, the attribution rules also apply to spouses. Any income or capital gains earned from the gifted property may be attributed back to you, the original owner, unless you elect out of the spousal rollover provisions by filing a specific election with the CRA and being paid market value for the property. This election allows the transfer to occur at fair market value, triggering immediate capital gains but avoiding future attribution of income.
Gifting Cash to Children
If you gift cash to a minor child, any income earned from investing that cash, such as interest or dividends, is attributed back to you for tax purposes. This means you’ll be taxed on the income, not the child. The exception is capital gains; any capital gains realized from investments made with the gifted funds are taxed in the child’s hands.
For adult children, the attribution rules generally do not apply. Income and capital gains from the gifted funds are taxed in the hands of the recipient. This can provide a tax-efficient way to help your children financially, especially if they are in a lower tax bracket.
Using custodial accounts or trusts can also be a way to manage gifted funds, particularly for younger children. Establishing a trust allows you to set terms and conditions on how and when the funds can be used, providing an added layer of control and potential tax planning benefits.
Gifting Stocks
Gifting stocks can be a tax efficient way to transfer wealth, but it involves careful planning.
Tax Implications for the Giver
When you gift stocks, the CRA considers this a deemed disposition at fair market value. That is, it’s as if you sold the stocks at their current market value on the date of the gift. If the stocks have appreciated since you purchased them, you may incur capital gains tax on the increase in value.
For example, if you bought shares for $4,000 and they are now worth $10,000, gifting them means you’ll need to report a capital gain of $6,000, of which 50 per cent ($3,000 ) is taxable income. This can result in a higher tax bill for the year, so it’s important to consider the timing and potential tax impact of the gift.
Tax Implications for the Recipient
The recipient of the gifted stocks does not face immediate tax consequences upon receiving the gift, and their adjusted cost base (ACB) for the stocks is the fair market value at the time of the gift. It’s important for the recipient to be aware of this, as it affects their future tax liabilities.
Keeping accurate records of the fair market value at the time of transfer is essential to ensure correct reporting when the stocks are sold.
Alternatives to Gifting Stocks Directly
If the process of transferring stocks seems complicated, or you’re concerned about the immediate tax impact, there are alternatives. One option is to sell the stocks and gift the proceeds. While this means you’ll realize any capital gains and pay taxes accordingly, it simplifies the situation for the recipient, who will receive cash without any attached tax obligations, and if they acquire those stocks with the cash, it is the same result for both parties as if the stocks were gifted.
Contributing to the recipient’s registered accounts, such as a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP), is another option. While you can’t directly contribute to another person’s TFSA, you can gift them cash, which they can then contribute to their own TFSA, allowing future investment growth to be tax-free. For RRSPs, you can gift cash to an adult child, who can then contribute it to their RRSP and potentially receive a tax deduction.
Gifting Real Estate to Children
Gifting real estate to your children can be a meaningful way to assist them financially, whether it’s helping them enter the housing market or passing on a family property. However, real estate transfers come with complex tax implications and legal considerations that must be carefully managed.
Tax Considerations
As with other property, gifting real estate to someone other than your spouse is considered a deemed disposition at fair market value. This means you’re treated as if you sold the property at its current market value, potentially triggering capital gains tax if the property has increased in value since you acquired it.
For properties that are not your principal residence, capital gains can be significant. You will need to report any capital gains on your tax return and pay the associated taxes. For example, if you purchased an investment property for $200,000 and it’s now worth $500,000, you have a capital gain of $300,000, 50 per cent of which ($150,000) is taxable income.
If the property is your principal residence, you may be eligible for the principal residence exemption, which can eliminate the capital gains tax on that transfer. However, specific criteria must be met, and proper documentation and reporting are essential to claim the exemption. Similarly, some farming property can be subject to favorable rules regarding gifting to the next generation, if it meets the proper criteria.
Land Transfer Tax (LTT)
In addition to capital gains tax, transferring real estate may trigger land transfer tax (LTT), which varies by province and municipality. In most cases, the recipient (your child) is responsible for paying the LTT based on the property’s fair market value at the time of transfer, even if no money changed hands.
Using Trusts or Other Strategies
Given the complexities and risks associated with directly transferring real estate, alternative strategies may be worth considering. Establishing a trust can provide greater control over the property while offering potential tax planning advantages. A trust can stipulate terms for the use and eventual distribution of the property, protect it from creditors, and potentially provide income-splitting opportunities.
Family limited partnerships are another option, allowing for gradual transfer of ownership interests while maintaining control and providing estate planning benefits. Due to the intricacies involved, it’s highly recommended to consult with tax professionals and legal advisors to determine the best approach for your specific situation.
Conclusion
Family gifting is a generous and loving act that can provide significant benefits to your loved ones. Whether you’re helping your children get a financial head start or passing on cherished assets, thoughtful planning is essential to maximize the positive impact of your gifts. Understanding the tax implications of family gifting in Canada is crucial to ensure that your generosity doesn’t result in unintended tax burdens or complications. By being informed about how different types of gifts are treated for tax purposes, you can make strategic decisions that align with your financial goals and family dynamics.
At Virtus Group, we understand that every family’s situation is unique. Our team of experienced professionals is here to help you navigate the complexities of tax laws and estate planning. We encourage you to seek professional advice to create a gifting strategy that benefits both you and your loved ones, securing your family’s financial well-being for generations to come.
