For many parents and grandparents in Canada, the desire to help your children often includes giving them cash, property or real estate. These gifts can help your children acquire a home, reduce accumulated student debt, or even help offset the costs of raising a family.
Before you offer a gift there are many implications, including financial, tax, and legal that you should consider. Reviewing your options can help ensure the right type of gift is given and that it is shared appropriately to meet the goals of both the giver and the receiver. This article will focus on gifting a property to a family member other than a minor child or grandchild, spouse or common-law partner, which may be affected by attribution rules.
Gifting property to adult family members
There are a few options when gifting to family members:
1. Write a cheque or transfer cash directly;
2. Transfer securities to a family member's investment account;
3. Purchase or transfer real estate with the help of a lawyer;
4. Settle a trust with your designated family members as the beneficiaries; and
5. Draft a Will to include specific family members.
Financial and personal considerations
Once a gift is made to a child or grandchild, the property given is likely gone and no longer available to the giver, even if there is a future financial need. Acknowledging this fact is very important and any gifts made should be considered within an overall financial plan to ensure that making the gift will not cause future hardship.
Further, once a gift is made, what happens to it is no longer in the control of the giver. For example, a treasured, long-owned family recreational property could be sold by the recipient or lost as part of the recipient’s divorce settlement.
Tax and legal considerations
When considering making gifts of property to help family members, these should be given primarily for the sake of providing assistance and demonstrating love, and not just for tax, probate, or legal planning purposes. However, before gifting a property to a loved one, it is recommended to consult with a tax and legal expert about the various ways in which such gifts can be structured.
The most common tax implication of making gifts of property is that any appreciation in the property's value between the time it was acquired by the giver, to the time it is gifted to the recipient, will be taxable to the person making the gift, since a gift to a family member (other than a spouse or common-law partner) will be deemed to occur at fair market value for tax purposes. Generally, the appreciation is taxable as a capital gain. This means that 50% of the appreciation is added to the tax return of the giver, in addition to their other income in the year that the gift is made. Depending on the amount of other income and the province of residence, the tax rate may approach 27% of the amount of the appreciation.
Gifting Canadian cash does not result in a capital gain, however, gifting investment securities can result in a capital gain based on the appreciation of the securities. Further, the gain in Canadian dollar terms that is taxable must also include currency gains (or losses) for securities denominated in U.S. dollars and other foreign currencies.
Gifting real estate can result in capital gains based on the appreciation, and recapture of previously taken Capital Cost Allowance; for example, if the real estate was previously used to earn rental income.
A property should never be transferred to a family member for sale proceeds that are less than the fair market value (“FMV”) of the property. Doing so would trigger double taxation, where both the transferor and the recipient can be taxed on the same growth.
The gift of property or real estate requires the legal change of ownership from the name of the giver to the recipient. Individuals will often gift directly to a family member in their name, however, there may be circumstances where a different form of legal ownership will provide additional levels of control or protection for the property gifted. Forms of ownership can include putting the real estate in a trust and naming the family member as a beneficiary of the trust, or gifting shares of a corporation if the property is already held in a corporation.
Joint ownership is also an option, although this doesn’t provide any additional protection and it complicates the tax issues, especially if the property was the principal residence of the giver.
Legal issues also arise if the family member who received the property gets a divorce. If the property being transferred is used as the family home, the value is considered a marital asset and its value may be lost in the process of a divorce unless the spouses agree otherwise in a marriage contract. Matrimonial property laws vary by province. It is advised to seek professional legal advice in relation to the treatment of marital assets depending on the province in which you reside.
Gifting versus waiting to bequest an inheritance
Determining the appropriate timing of when to make gifts of real estate or other property to family members is often a tough decision. A balance must be found between gifting when help is needed most, ensuring that the family member is mature enough to receive such a valuable gift, and making sure the gift won’t significantly affect the financial needs of the giver.
The cost of making a gift, especially of costly real estate, while alive must consider not only the value of the real estate, but also any tax costs that would require immediate payment. Though deferring a gift to an inheritance doesn’t eliminate the recognition of the appreciation for tax purposes, the concern of potentially running out of money while alive won’t be a factor.
Where there is more than one child, making sure that each is treated equally, or equitably based on their unique situations, should be considered. One child may receive a gift earlier and others later through an inheritance. Fairness between beneficiaries should be a consideration in any estate plan in order to maintain family and sibling harmony.
It may be possible to benefit from lower overall tax costs if gifts are given over several years, resulting in the taxation of capital gains being spread out at potentially lower marginal tax rates each year, rather than waiting to gift through the Will.
If the beneficiaries of a Will are not happy with their allocations, these may be challenged, resulting in legal costs for the estate and family tension. This may be a reason to consider making gifts earlier.
If the gifted real estate is in the U.S. or if either the giver or receivor of the gift is a U.S. person, then U.S. income taxes and estate/gift taxes will be a concern and should be addressed with knowledgeable professionals in these situations.
Property gifts with mortgages
One way of providing some protection when giving real estate from both the risk of a child’s divorce or from having future financial hardship is to take back a mortgage (equal to the FMV) on the property that is transferred. The value of the mortgage will be deducted from net family property in the case of divorce, keeping that value with the child. As well, payments on the mortgage can help with future cash flow needs of the giver and a capital gains reserve may be available to defer the taxation of any accrued gains over several years.
In the future, it may also be possible for the parent who is giving the property to forgive any mortgage at the time of their passing through the Will without any tax consequences.
How a professional can help
Gifting assets to family members requires an understanding of the potential financial, tax, and legal implications. We recommend engaging your lawyer, accountant and financial advisor as each will provide their expertise in helping you to consider all aspects of making a gift. This will help to ensure that planning, legal, and tax issues are addressed in your decisions.
For more information, please speak with your BMO financial professional.
You might also be interested in these related articles:
Article 1: Canada’s Real Estate Market: 5 Things You Need to Know
Article 2: Federal Budget 2022: 8 Measures that Could Make Real Estate More Affordable
Frequently Asked Questions
Is a Gift Deed taxable in Canada?
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A Gift Deed is a legal document drafted with the assistance of a lawyer to formally transfer ownership of property such as real estate, cash or another asset. The gift is made without expectation of payment or reimbursement now or in the future.
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Depending on the asset given away, there may be tax implications on the transfer. An example would be the gift of a piece of land that has appreciated in value. The appreciation is generally taxable to the person making the gift in the year that the gift is made.
How do I avoid capital gains when inheriting property in Canada?
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The individual who inherits a property is not subject to capital gains tax when they receive property. Instead, it is the estate of the deceased individual that is responsible for paying taxes on the appreciation in the value of the gifted property, both to the date of the deceased and potentially to the date of the gift if further appreciation has occurred.
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The appreciation at death is typically not taxed when the recipient is the deceased’s spouse or common-law partner (CLP), since the default treatment of the deemed disposition at death under Canadian tax law allows for a tax-free rollover at cost (vs. FMV) to the surviving spouse or CLP (or qualifying spousal trust) at death or during lifetime.
What happens when siblings inherit a house together?
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Depending on the strength of the relationship between siblings, decisions can be made together about whether one or both will use the house, or if the house will be sold or rented out. Often if one sibling receives greater value from the house, other assets from the estate could be allocated to the other sibling in accordance with the deceased’s Will so that each sibling is equitably treated.
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If there is a disagreement between the siblings, mediation may be required to determine how best to allocate the house and its value.
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In situations where a child already has their own principal residence, it may not be possible to shield future gains on the inherited property from future tax.
Can I avoid inheritance tax when I receive my parents’ house?
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Canada does not have inheritance taxes per se. Your parent(s) may not have any tax payable on their final tax return if the home was eligible for the principal residence exemption for all years that it was owned. Otherwise, due to the deemed disposition at FMV at death under Canadian tax law, your parent(s) may be subject to tax on their final tax return based on appreciation of the home, for years that the principal residence exemption could not be claimed.
Who pays capital gains taxes on gifted property?
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It is the giver of a gift, not the recipient who is subject to capital gains taxes on any appreciation of the property, from the time they take ownership of the property to the time they gift it to the recipient.
Disclaimer
BMO Private Wealth provides this publication for informational purposes only and it is not and should not be construed as professional advice to any individual. The information contained in this publication is based on material believed to be reliable at the time of publication, but BMO Private Wealth cannot guarantee the information is accurate or complete. Individuals should contact their BMO representative for professional advice regarding their personal circumstances and/or financial position. The comments included in this publication are not intended to be a definitive analysis of tax applicability or trust and estates law. The comments are general in nature and professional advice regarding an individual’s particular tax position should be obtained in respect of any person’s specific circumstances.
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