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What's CRA's Position on Family Gifts?

Avoiding Tax When Giving Gifts to FamilyLarge gifts of money and property will get CRA's attention. Follow these tips to limit the tax burden for giver and receiver.

Gifts of property among family members are common and can be very welcome for the recipient and satisfying for the giver. Although Canada has no gift tax, in some cases a gift can trigger tax rules that could increase your income taxes and prevent a win-win situation for both you and the recipient.

These tax rules are in place to ensure that, first, taxpayers do not abuse income splitting strategies and, second, that CRA receives all income taxes to which is it rightfully entitled.

Income splitting strategies are designed to shift taxable income from individuals in high tax brackets to family members in lower tax brackets. The Income Tax Act, however, contains several income attribution rules that, in many cases, will override the income splitting efforts of taxpayers by extracting tax that otherwise was payable.

Attribution rules apply to several situations, including:

  • Income and losses from property transferred to a spouse or minor family member
  • Capital gains/losses realized on property transferred to a spouse
  • Transfers of property to a trust.

Note that in tax terms "transfer" has a broad definition that covers just about any way ownership of a property is moved from one person to another. A transfer includes both a gift and a sale.

Election to Avoid Attribution Rules

Property transferred at fair market value (FMV) is not subject to attribution rules. If you want to transfer property to your spouse as a gift and still avoid attribution rules you must elect that spousal rollover rules do not apply. In that case, you then will report any accrued gains on the property and your spouse will report any future gains.

Should you sell or transfer property to a family member for less than fair market value (so you give them a cut rate but not an outright gift), not only could attribution rules apply, but CRA will adjust your "deemed proceeds" from the transaction upward to the property's FMV. This triggers any accrued gains, which will be taxable. And your relative will also be deemed to have received property equal to whatever he or she paid for it, not its FMV.

Avoid Double Tax With a Gift

In such a case, the family as a whole might end up paying double tax on a portion of any accrued capital gains. That's because the recipient will also be taxed again on that portion of the gains between his or her actual cost and the FMV at the time of transfer which you will have already reported.

However, if you make an outright gift of the property to your family member, the family member's cost is "bumped" up to the FMV, thereby avoiding this double-tax issue.

On the other hand, there also is a downside to giving property to a family member for a stated value that is higher than its FMV, as the family member's deemed cost will be adjusted downward to the FMV. Your proceeds of disposition for the property would still equal the actual selling price you had set on the property at the time of the transfer.

Making the gift or transfer of property to your spouse, as opposed to a child or other family member, usually will automatically occur on a tax-free basis, unless you elect otherwise. However, you and your spouse must both be Canadian residents at the time of the transfer.

If you transfer property to your spouse or a family member who is under 18 years of age, any income earned from that property is attributed to you, the transferor.

Similarly, any loss from the property also becomes your loss. However, this rule does not apply to a transfer of property for use in a business of a spouse or minor.

Income from the property could be in various forms, including interest, dividends, rents and royalties. A loss from the property could arise in a situation where the expenses incurred to earn income from the property exceed the income earned.

Expenses incurred for the purpose of earning interest and dividend income could include interest paid on borrowed money, investment counsel fees, and other carrying charges.

If you transfer the property to your spouse, any capital gains or allowable capital losses on subsequent disposal of that property also attribute to you.

However, if you give the property to a minor family member, such as a child, grandchild, niece or nephew, the capital gains or losses do not attribute to you. Therefore, if you have assets you expect to increase substantially in value, such as shares in a corporation, jewellery or art, consider transferring them to your children or a trust for your children.

While any dividends will be attributed to you until your children reach 18, capital gains on the sale of the assets will not be.

Good Ways to Give

While the attribution rules may sound restrictive, there are some additional ways you can make gifts to your family members that will create some tax benefits for you.

For example, you could make a gift of your home and if it was your principal residence for each year you owned it, the transfer will be tax-exempt. To qualify as a principal residence you, your spouse or child must have ordinarily inhabited it.

You also could transfer a non-principal residence, such as a cottage or a rental dwelling, to an adult child and it could qualify as the child's principal residence if the child occupied it. You would be liable for any accrued gain up to the time of transfer, but assuming the home remained your child's principal residence, there would be no further taxable gain for the child.

You also could consider making the following types of gifts to family members that will avoid attribution rules: 

  • Use your own funds to pay your spouse's tax bills throughout the year. Since the payment goes straight to CRA and is not invested by your spouse, there is no property from which income can be attributed. That means that any funds your spouse would have used to pay the income taxes can be invested without the income being attributed to you.
     
  • Pay the interest on your spouse's investment loans. There will be no attribution so long as you do not pay any principal on account of the spousal loan. The interest will be deductible on your spouse's tax return.
     
  • Make contributions to your spouse's RRSP. Income earned in the RRSP is tax-sheltered and when the funds are turned into an annuity or RRIF the payments are income to your spouse.
     
  • Make gifts to your adult children (18 or over) to enable them to earn sufficient income to absorb their deductions and credits and also to pay for certain expenses that you would ordinarily pay out of after-tax dollars.
     
  • Give your adult children enough funds to allow them to make the maximum deductible contributions to their RRSPs.
     
  • Deposit Canada Child Tax Benefits or Universal Child Care Benefits into your child's bank account or a Registered Education Savings Plan (RESP) because attribution will not apply to income earned on these funds.

It's great to give and receive gifts, just be sure you do it correctly to avoid the gift becoming a tax burden. Make sure you consult with your accountant or tax professional ahead of time or you might end up with an unexpected tax bill.

Read the following Knowledge Centre articles for more information on family gifts as well as charitable gifts:

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Comments

The last point about depositing Canada Child Tax Benefits or Universal Child Care Benefits into an RESP mentions there's no attribution on income earned.

However, there is attribution in RESPs (If you withdraw your money because the child does not go to school, all the increase is taxed in your name. If your child goes to school, they pay tax on the money as they receive it from the RESP.) Therefore there would be attribution as far as the RESP goes, and you would be wasting the use of these CCTB and UCCB payments if you put them in the RESP.

You are correct, if the child does not go to school and the contributor withdraws the funds then the income is taxed in the hands of the contributor. 

However, looking at the purpose of an RESP, to set aside money for the education of the child, there is no attribution when it is used for this purpose. And the withdrawals are taxed at the presumed lower tax bracket of the student making this a great income splitting strategy and a way to gift money to children or grandchildren.  

Most RESP plans today have an extension period so even though the student doesn’t attend a post-secondary institution immediately after high school, the funds in the RESP could sit there and be used by the recipient should they attend school later in life.

I just got married and discovered my spouse had zero in TFSA's.
I have a much larger nest egg than her, and my own RRSP and TFSA tax shelters are already maxxed out, so I moved some moneymarket "cash" from my accounts into her TFSA accounts to take advantage of her unused tax shelter allowances.
I did the same to top up her lifetime RRSP allowances.

Now that both our RRSP's and TFSA's are fully maxed out,
I'm also considering moving the rest of my non sheltered "cash" into a cash account in her name. So that any future interest earned would be in her name instead of mine. (she makes less income than I do)

Having filled our first joint income tax return, I didn't really notice anywhere that stated any problems with these ideas---am I doing anything wrong?

Regards,
Steve

Hi Steve, there is no attribution on TFSA’s so there is no issue with you contributing to your spouse's TFSA.

Technically the RRSP contribution should be made by the contributor (wife in this example) not the contributor’s spouse (husband).   So if the taxpayer (wife) can show sources of income in the year the spouse (husband) made the contribution there should be no issue with CRA.  

Attribution rules do apply for the transfer of funds into unregistered accounts.

I recently purchased a very large block of shares in a public company. My TFSA is almost maxed. Can I legally gift a quantity of shares to any of my adult children's TFSA? Is there a limit CRA allows?

Hi Monty, you can legally gift an unlimited amount of shares to adult children.

The transaction is deemed to occur at fair market value so if there are any gains or losses on the transfer they must be declared.

There is no attribution rules for adult children.
 

Is there a maximum amount of cash that a parent can give a child?
Are there any income tax rules to be wary of?
If my Mom would like to gift each of her five children $20,000.00 each do the children have to pay tax on this income?
Thanks
Molly

Hi Molly, there is no limit on gifts from a parent to adult children.

You would need to pay tax on any income generated from the principle amount, such as interest earned on the amount in a bank account, but there are no attribution rules to consider on the gift itself.

 

we would like to gift a 1998 5th wheel to our daughter.Are there any tax implications we should know about. T

An asset (in a gifting situation) is deemed to occur at fair market value (FMV).  So there are no tax implications unless the 5th Wheel has appreciated and the FMV is greater than the original cost.  

If there is a gain on the transfer of the asset it would be included in income (taxable capital gain) at 50% of the value of that gain.  No capital losses are permitted on the transfer of personal use property.

I am interested in purchasing a new-build townhome as an investment property rather than invest in mutual funds\bonds. I understand that HST must be paid at 13% in ontario on investment property (paid to the builder) and the landlord will have to apply for a rebate (after meeting the criteria).

My question is, if the home I am interested in purchasing falls well below the 350k range, do I still need to declare the purchase as an investment property? The home I am interested in is 250k and I do not expect the FMV to be anywhere near 350k upon completion.
The reason why I ask is because the added HST will significantly increase the downpayment and land-transfer tax.

Value could very well determine the specific rate charged; however, you should declare your specific intent as rental property or principal residence based on your own intended purpose.

I received 99 thousand US dollars from my parents to help me with my downpayment for a new home as a first time home buyer in Toronto.
My parents are overseas and non-Canadian citizens. I received this amount via a wire transfer to my account in Canada.
Do I have to pay any taxes for this money gift? Is there anything I need to do? I currently do not have a job and therefore have no income and no income tax to pay for this year 2013. Thanks for helping.

From a taxable perspective, you don't owe taxes on a gift, regardless whether it's Canadian or foreign source. (Good luck on your house hunt.)

thank you so much for your response, my mortgage broker is now going through the process, the home i am buying is $350,000. I am putting down $200,000. Therefore the mortgage will be $150,000. He is asking for financial records and proof of money history, etc, and he said that my parents have to sign a "gift letter" just stating the amount they are giving me (99,900 CAD) is from them, and I will not be required to return this amount. Is this normal? Any implications for them to sign this letter in terms of tax implications?

This is normal for a finance company to ask for past bank statements to determine source of funds.

There would be no Canadian tax obligations to your parents for signing a gift letter.

Hello,
I want to give my wife money as gift to contribute into her TFSA. She doesn't work so she doesn't have an income. Should she declare the gifted fund to the TFSA as an income? In this case, I won't be able to get Income Tax Refund for her. Please advise.

Thanks

There is no attribution on TFSA’s so there is no issue with you gifting money to your wife to contribute to her TFSA. The gift isn't considered income.

Wondering about gifting of $ (via wire transfer) to a sister & niece who live in Australia. Gift of $ might come from me (Canadian resident) or Father / Grandfather (Cdn resident).

Are there tax implications to us as "senders" ?
Any known restrictions to the recipients?
Thanks.

There are no income tax implications for Canadian residents sending funds (cash gifts) abroad. 

As far as the recipients receiving it… each country administers their own tax system and residents of those countries are generally taxed domestically.  

It's difficult to comment on other countries tax system and the tax implications to residents of treaty and non-treaty countries. 

Since Australia has a similar tax regime as Canada it's unlikely there will be tax implications to gifting; however, the recipient should confirm with someone who has experience with Australian law.

Thank you for this article, it was really helpful. I'm going to receive a gift from my aunt of $20,000, she lives in south America. Would there be tax implications on this money? Would it be declared as income?
Thanks for your help!

Whether received from a Canadian citizen or not, there are no tax consequenses to receiving a gift.

Comments to this article have been closed. Review past comments and our other Knowledge Centre articles for an answer to your question or contact us to meet with one of our tax specialists.

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