How are Gifts of Capital Property Taxed?
It is well established in Canada that gifts and inheritances are tax-free windfalls enjoyed by taxpayers. The Federal Court of Appeal in Bellingham v The Queen outlined that gifts are not taxable because they are non-recurring amounts that do not arise from a productive source of income. Rather, gifts and inheritances are essentially transfers of old wealth and not newly created income.
While this rule is generally applicable to most types of gifts and inheritances, there are certain exceptions. Gifts of capital property have a different tax treatment and can result in tax liability for the giver. These rules apply to gifts between related parties such as parents and children or between arms-length parties such as gifts to charitable organizations
What is Capital Property and what is a Deemed Disposition?
Capital property includes depreciable property, and any property, if sold would result in a capital gain or loss. Examples of capital property include land, buildings, cottages, stocks, bonds, and mutual, trusts. Although the receiver would not be liable for any tax, the giver may have to pay tax on any capital gains that arise from his or her gifting of the property.
A deemed disposition is where a sale did not actually happen, but our tax rules treat the situation as if a sale occurred.
Under section 69(1) of the Income Tax Act, if a capital property is transferred as a gift, the giver is deemed to have disposed of the capital property for equal to the fair market value of the property at the time of the transfer. This means that even though the giver did not sell the property, they may have to report any capital gain or loss on the tax return for the year based on the fair market value of the property at the time of the gift. Likewise, the receiver would have received the capital property as a gift with an adjusted cost base that is the fair market value of the property. This detail is important to note because it may greatly reduce the capital gains earned by the receiver if they were to later sell that property for a profit.
In certain situations, the deemed disposition rule will not apply to gifts of capital property. For example, if the gift is made to the giver’s common-law partner or spouse, the amount of the transfer would be deemed to be equal to the original cost base of the property, therefore there would be no capital gain.
There may also be other exemptions available if the gift of the capital property was made to a registered charity or other qualified donees. The donor may be entitled to an inclusion rate of zero for certain types of property donated, thereby resulting in no capital gain or loss. Certain elections under section 85 of the Income Tax Act may also apply if gifts of capital property are transferred to a corporation.
If you plan on gifting capital property, contact Rosen Kirshen Tax law today to discuss your options. We are here to help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.