There is no “gift tax” in Canada. Any resident of Canada who receives a gift or inheritance of any amount from almost any source (except from an employer) will not have to include this in their income. However, if capital property (e.g. real estate, investments) is given as a gift, the person who has given the gift will be deemed to have sold the capital property at fair market value (FMV), and will have to pay tax on any resulting capital gain. The FMV is deemed to be the “cost” to the person to whom the shares were given. If money or capital property is given or loaned to a spouse or a related minor child, attribution rules will apply.
As pointed out by the Video Tax News team in the April 2019 Life In The Tax Lane video, there could be a problem if capital property is sold to a non-arms-length person for less than FMV.
See Technical Interpretation 2018-0773301E5 Paragraph 69(1)(c) and Nominal Consideration.
Subsection 69(1) of the Income Tax Act deems the proceeds to be at FMV when a taxpayer has disposed of a property non-arm’s-length for no proceeds or for proceeds less than FMV. However, it only deems the acquisition cost of the recipient to be at FMV if the property has been acquired at a cost higher than FMV, or by way of gift, bequest or inheritance. It does not deem the cost to the recipient to be at FMV where the cost is less than FMV (inadequate consideration). This may result in the selling taxpayer to have deemed proceeds of FMV while the acquiring taxpayer must use the actual transaction amount as their cost.
Example:
- Taxpayer A and Taxpayer B are considered to be not dealing at arm’s length.
- Taxpayer A gifts a capital property valued at $10,000 to Taxpayer B for proceeds of $1, merely to ensure that the agreement is legally binding. It is possible that this could be considered by Canada Revenue Agency (CRA) to be a gift.
- S. 69(1)(b) of the Income Tax Act (ITA) will apply to deem Taxpayer A to have received proceeds of disposition of $10,000, FMV.
- If it is determined that the transfer was a gift, s. 69(1)(c) of the ITA will apply to deem Taxpayer B to have acquired the property for $10,000, FMV.
- If it is determined that the transfer was a sale for inadequate consideration rather than a gift, s. 69(1)(c) will not apply, and the acquisition cost to Taxpayer B will be $1, even though Taxpayer A has deemed proceeds of $10,000.
If Taxpayer A had sold the property to Taxpayer B for $12,000, s. 69(1)(a) of the ITA applies to deem the acquisition price to Taxpayer B to be $10,000. The proceeds of disposition for Taxpayer A is still $12,000.
Tax Tip: If you plan to gift capital property or transfer it at less than cost, get professional tax advice first!
Gifts From an Employer
The above does not include gifts from an employer to an employee, which will likely be considered a taxable benefit to the employee. CRA has a series of questions that an employer can answer to determine if there is a taxable benefit. This is found on their web page Gifts, Awards and Long Service Awards. For more information on gifts or awards for employees, see the Canada Revenue Agency ( CRA) guide T4130 Employers’ Guide Taxable Benefits, and search for the topic “Gifts, awards and social events”.
Capital Property Owned at Death
There are tax consequences to the estate of a deceased taxpayer when capital property is owned at death. See How can you minimize taxes of a deceased taxpayer? from the Wills & Estates page
Gift From Someone in Debt to Canada Revenue Agency
If a tax debtor transfers cash or other property, directly or indirectly, by means of a trust or by other means whatever, to:
- their spouse or common-law partner, or someone who has since become their spouse or common-law partner,
- a person who is under 18 years of age, or
- a person with whom they are not dealing at arm’s length
then the recipient of the cash or other property can be held liable to pay outstanding tax liabilities of the transferor, up to the fair market value of the property transferred, less the fair market value of anything that was given in return.
This applies, for instance, if a spouse transfers his or her interest in the family home to the other spouse. It could also apply if a private corporation pays dividends when there is an outstanding tax liability. See the arm’s length article.
(article source: https://www.taxtips.ca/personaltax/when-are-gifts-and-inheritances-taxable.htm)
