CANADIAN TAXATION: GIFT RULES
Canadian Gifting Rules
The provision of a gift to a loved one or intended beneficiary during your lifetime is one
means of avoiding the application of avoiding probate fees in Ontario. If you do choose to
make a gift, you must ensure that it is validly made. The following elements must be present:
- The donor must be competent to make the gift.
- The donee must be capable of taking the gift.
- The donor must have a clear and unmistakable intention to absolutely
and irrevocably divest himself of the title and control of the item gifted.
- There will be an irrevocable transfer of the legal title and control
of the entire gift to the donee such that the donor can no longer exercise any control over it.
- There is delivery by the donor to the donee.
- There is acceptance by the donee.
When making gifts, there are some pitfalls posed by the Income Tax Act of Canada.
They concern the income attribution rules which relate to gifts made to spouses and minor children.
There are also rules to be aware of generally concerning gifts made under non-arms length
circumstances.
The Attribution Rules
On gifts to spouses, income and capital gains will be attributed back, unless you elect out
of the tax free rollover provisions of the Income Tax Act. On gifts to children under 18,
income only will be attributed back.
Non-Arm's Length Transactions
Non-arm's length transactions under the Income Tax Act are treated such that the donor of
the gift will be deemed to have disposed of it at its fair market value. Thus any accrued gain
represented by fair market value in excess of the donor's cost of the property will be subject
to tax. Depending upon the nature of the property, the gain will be capital or income, or
possibly both.
The recipient of the gift will receive it at a cost base which is equal to the fair market value.
In non-arm's length transfers, you should be aware of the consequences of transfers of
property for inadequate consideration. The transferor will still be deemed to have disposed
of the property at its fair market value and be subject to tax on any gain. The transferee,
however, will not acquire the property at its fair market value, but instead at the value of
the consideration paid for the property. The situation thus has the potential for double
taxation when the recipient of the gift ultimately disposes of it.
In certain circumstances, such as a gift to a Charitable Foundation, it may be preferable to make such a transfer by gift rather
than by way of an inadequate consideration.
When utilizing the gift as an estate planning tool, take the necessary steps to
ensure the validity of the gift. Further, heed the trappings of the Income Tax Act. Taking
the time and counsel of your tax advisor and lawyer will assist you in both concerns.
Otherwise, your gift may come undone, or, you may get stuck with the tax bill while the
recipient enjoys the income or capital, or both, produced by your gift.
