Gift Tax: Is Gifted Money Taxable in Canada?
People often wonder if Canada has a gift tax. In other words, are there any rules to follow when you want to give money or other non-cash gifts to someone? While it’s a complex topic, this article will explain when you can give or receive gifts without paying taxes, and some of the exceptions that apply for a capital property.
Is There a Gift Tax in Canada?
In short, there is no gift tax in Canada. If you, as a Canadian resident, receive a gift, you do not have to report it to the CRA, and there shouldn’t be any tax implications.
However, there are a few exceptions, and because people may have differing opinions on what constitutes a “gift”, it’s important to review them.
Gift from An Employer: If you receive a gift from your employer, it’s considered a taxable benefit and must be reported as such to the CRA. Fortunately, your employer is responsible for keeping track of taxable benefits and will report the appropriate amount on your T4 slip. Good examples would be a gift card or a nice watch given for a service anniversary, i.e. 25 years with the company.
Tips, Gratuities at Work: Receiving tips at work may feel like a gift, but the government considers it taxable income. You should have a system in place to include tip/gratuity income on your T1 General Return.
The Canada Revenue Agency lays out rules for employers and employees as it pertains to gifts, awards, and long-service awards. For example, for an employer to give a non-taxable gift, it would have to be for a special occasion like religious holiday, a birthday, a wedding, or the birth of a child. Under some circumstances, awards can be non-taxable, but employee rewards that are tied to long service or performance are considered taxable.
What Are Attribution Rules?
Generally speaking, attribution rules are designed to prevent fraud or tax evasion. They do not apply to property that is transferred at Fair Market Value (FMV).
They prevent high-income individuals or corporations from reducing their tax burden by transferring income-producing assets to lower-income family members, like a spouse or child. A couple of examples are real estate and stock investments. If a capital property is transferred as a gift or at less than fair market value, attribution rules may apply.
Understanding How Attribution Rules Work with Gifts
Here are some ways in which attribution rules may impact gifts or loans between family members in Canada.
There are tax implications for gifting real estate to a non-arms length individual, such as a spouse or minor child. While the person receiving the gift won’t pay tax on the gift, the transaction is considered a disposition of capital property. The person transferring the property will have to report any corresponding income or losses on their tax return. In other words, the income is attributed back to the person disposing of the property. The rule doesn’t apply if the property is going to be used in the business of the spouse or minor.
Disposition of Capital Property at Death
Another instance is when the capital property is transferred between an estate to the beneficiaries of the deceased. In other words, you can’t “gift” a capital property to an heir when you die – your estate will have to pay tax on the income when the property is transferred. This includes principal residences, cottages, or investments, such as stocks and bonds. A principal residence may qualify for a capital gains exemption.
Receiving a Gift from a CRA Debtor
If you owe money to the CRA and gift capital property to someone with who you are in a non-arms length relationship, they may be liable for the outstanding tax liabilities of the debtor. This includes a spouse or common-law partner, a minor (under 18) or anyone else the giftor has a non-arms length relationship with. This attribution rule prevents a CRA debtor from being able to hide assets from the government.
Glossary of Terms
Tax-related subjects are always complicated, which is why it’s best to consult a tax professional for any specific questions related to the tax consequences of gifting capital property. Understanding the terminology can help. Here are some definitions for the
Attribution Rule: Ensures the income or losses from a capital property that has been transferred to an individual or trust are attributed back to the original owner.
Fair Market Value (FMV): The price a property will sell for on the open market. FMV assumes that both parties (buyer and seller) are knowledgeable about the property, are not under undue pressure, are acting in their own best interests, and have a reasonable amount of time to complete the transaction.
Capital Gain: Represents the profit from the sale of a property or investment. As a straightforward example, if you purchase a real estate property for $200,000 and sell it for $300,000 five years later, you will incur a capital gain of $100,000, all things being equal.
Capital Gains Tax: The tax levied against the profit (capital gain) from the sale of a property or investment. In Canada, the capital gains tax rate is 50%. Using the above example, if you incurred a $100,000 capital gain from the sale of an investment property, you would be taxed on $50,000, or 50% of the capital gain.
Deemed Disposition: The Canada Revenue Agency considers a deemed disposition to be the point when someone disposes of a property or investment. There are many situations where assets can be disposed of: at death, the sale of an income property, or a gift of property.
Capital Property: Refers to an asset that can incur a capital gain or loss. This includes real estate properties, such as rental properties, vacation homes, raw land, or investments like stocks or mutual funds.
Income Tax Act: The Income Tax Act is a complex document that contains all of the taxation laws in Canada. The Income Tax Act is continually being updated as successive governments make changes to the tax rules. This includes changing tax rates, adding or removing different tax credits, etc.
Final Thoughts on Gifting Money in Canada
There you have it, a very brief overview of the laws surrounding gifting money in Canada. While Canada does not have a gift tax per se, not all gifts are tax-exempt. Attribution rules apply in many situations when you transfer assets. If you’re unsure of the tax rules, don’t try to figure it out on your own. Consult with a tax professional before you dispose of any capital property.
Is there capital gains taxes on cottages/ trailers that are on land lease
If so is the lease considered a tax deduction against the capital gain ?
If I do a transfer of stock/ETFs from my non-registered account to my grandchild’s RESP, do the attribution rules apply on the stock/ETFs now in the RESP? When I did a cash transfer between these accounts Questrade requested confirmation that it was a gift, before they completed the transfer.