Tax Brief: Sometimes, When Giving a Gift, the Taxman Will Want Some Too
Understanding the various types of gifts and their treatment by the CRA, will enable you to be aware how to gift the maximum amount possible to others, while potentially reducing the tax consequences. The two main types of gifts are classified as either “inter-vivos” (gifts made during your lifetime) or “testamentary” (gifts made upon death). In either case, the party giving the gift may expose themselves to tax liabilities.
Issue: Clients are seeking ways to pass on wealth to their intended recipients, be it family, friends and/or charities. Passing on gifts, is a wonderful way to do so. However, sometimes giving a gift can result in unintended tax consequences. Sure, the recipient of the gift may receive the gift tax-free, but did you really give a gift just so you could be facing a potentially large tax bill? Therefore, it’s important to understand the Canada Revenue Agency’s (“CRA”) position on gifts and their related potential tax impacts.
Things to know: Taxable situations generally occur when “in-kind” gifts are made. In-kind gifts include shares, real estate, property etc. Via in-kind gifts, the CRA assumes a deemed disposition at fair market value at the date the gift occurs and therefore, any capital gains could result in taxes owing.
However, sometimes in-kind gifts may be eligible for tax-free treatment. For instance, utilizing other tax rules such as spousal rollover, principle residence exemptions etc., could turn a generally taxable event into a tax-free gift.
Conclusion: Just because a gift may result in a taxable event, doesn’t mean it should be avoided. From a tax perspective, even a taxable gift may ultimately be the more tax-efficient means to distribute wealth. For family planning, and even estate planning, paying tax on gifts today, may result in less taxes tomorrow.
After careful consideration of the other tax beneficial methods to pass on your assets, you need to figure out whether giving the gift is worthwhile. It is therefore advised that you seek the assistance of competent professional advisors to guide you through your particular situation and financial goals.