Tax implication of gifts and estates

Placeholder ImageWho doesn’t like to receive a financial help? Whether it’s a birthday, graduation or wedding, $10 or $10,0000, while the benefactor (the person giving the gift) is alive or as a result of their death, it is common to provide financial gifts to loved ones.

 But what are the tax implications of receiving financial gifts? A gift, is something voluntarily transferred by one person to another without compensation. For tax purposes, a gift is a transfer of property where less than full value (or less than fair market value) consideration is received in exchange. Unlike the U.S., Canada does not have a gift tax. This means that there is no limit to the amount that can be gifted to a family member, and no taxes are payable by the recipient at the time of receipt of the gift.

However, there are other tax and legal implications to consider before making financial gifts to loved ones. When making a gift, the benefactor is deemed to dispose of the gifted property for notional proceeds equal to either the original cost of the property (for gifts to a spouse), or the fair market value of the property (for gifts to anyone other than a spouse). Gifts of property other than cash, that are subject to a deemed disposition at fair market value, can attract tax where the property has increased in value since the time of original purchase. However, where the financial gift is cash, the deemed disposition would not attract tax to the benefactor.

 If the recipient of the gift is a minor (<18 years of age), or a spouse, there may be further tax implications to the benefactor after the time that the gift is made. In these instances, any future income generated from the investment of the gifted property (cash or otherwise), will be taxable to the original benefactor. This concept, known as attribution, ensures that financial gifts are not made to spouses or minor children for the purpose of shifting income to another taxpayer. The attribution rules may also apply if a financial gift is made to a person (other than a spouse or minor) for the purpose of avoiding tax.

If a significant financial gift is made to a family member during the benefactor’s lifetime, it may be prudent to prepare a deed of gift, or to document the benefactor’s intent. Post-mortem legal disputes can arise where a financial gift is made during the benefactor’s lifetime, but family members disagree as to the benefactor’s intent at the time of the transfer. Preparing supporting legal documentation can help to avoid future family disputes.

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