We often get asked by our clients whether they can gift property to their children – and if so, whether there are any tax considerations. The answer is not always what people expect to hear.

Transactions at Fair Market Value

If capital property (for example real estate or investments) is given as a gift, the transaction is deemed to occur at fair market value (FMV).

Determining Fair Market Value

Canada Revenue Agency (CRA) is interested in getting paid the correct amount of tax on a gift transaction, and they are inclined to review such transactions. If the FMV provided in a transaction is too high or too low in CRA’s opinion, they may attempt to adjust the value.

FMV is generally defined as the highest price that a property would bring in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.

In reality, there may be multiple ways to determine the FMV of a property, but the method should be reasonable and appropriate under the circumstances. If real estate generally sells for much higher than assessed value, then a provincial property assessment value may not be appropriate to use as FMV in a gift transaction.

Tax Consequences – Transferor

The person making the gift is deemed to have disposed of the property at FMV. This will often result in a capital gain to the transferor.

For example, assume that a parent acquired real estate in 1990 at a price of $200,000 and now wishes to gift the property to their child. If the property is now worth $500,000 then the parent will have a capital gain equal to $300,000. Depending on the parent’s marginal tax rate, there could be a significant amount of tax to pay on the transfer.

Tax Consequences – Transferee

The recipient of a gift generally does not have an immediate tax consequence related to receiving property as a gift. There is no “gift tax” in Canada. For this reason, property without any unrealized gain attached to it (such as cash) can often be gifted with no tax consequences to either the transferor or the transferee.

When a child receives a gift of property from their parent, the parent pays the tax and the child inherits the FMV as their new “cost base” in the property.

If the child in the example above receives real estate from their parent worth $500,000 as a gift, the parent will “catch up” the tax on the FMV of the real estate, and the child will have a cost base on the property equal to $500,000. This means that when the child sells the property down the road they will be allowed to deduct $500,000 from the sale price in determining their capital gain.

Other Tax and Planning Considerations

Transactions such as gifts can be complex and require planning and analysis of multiple issues. Your tax advisor or lawyer may be able to discuss other options besides a gift that meet your objectives. A number of other considerations to keep in mind include:

Selling property for FMV – depending on your circumstances, a “real” sale to your child at FMV may be the best option for meeting your objectives. You may actually have more flexibility in this type of transaction to structure the sale in a manner to reduce tax to you and to benefit your child.

Selling property for nominal consideration – this is an area that requires significant care, as the results could be much worse than gifting property. In a non-arm’s length transaction such as between a parent and a child, generally a gift is much more favourable than a sale at $1.00 from a tax perspective.

Gift now or later – you may wish to consider the tax consequences of a gift now versus a gift through your Will.

Move property into a trust – you may benefit from moving certain types of property into a trust at certain times.

Adding children to title – we often see parents add their children to the title on real estate during their lifetime. This can have tax and reporting implications that you may be unaware of and we recommend consulting your tax advisor before adding children to title.

Transferring to a minor child – there are significant issues to navigate related to transfers to minor children. This type of planning should not be executed without advice from a tax expert.

 

Written by: Chris Brien, CPA, CA

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