Property Transfers: Avoid Costly Tax Situations

Making a gift to an heir during your lifetime has tax implications that you need to be aware of in order to make the best choice.

A gift is essentially a gratuitous contract whereby one person (the donor) transfers ownership of property to another person (the donee).

The donor is therefore poorer and the donee is richer because the transfer is made without consideration.

What is the property in question?

Generally, gifts include the following:

Depending on the nature of the property transferred and the relationship of the donee to the donor, the tax consequences will be different. You must therefore be aware of these different impacts before undertaking the transfer.

Tax impacts similar to a sale

For tax purposes, the general rule is that a gift is considered a deemed disposition at fair market value of the transferred property.

This has the same tax implications for the donor as a sale, such as a capital gain or loss and a recapture of capital cost allowance for depreciable property, if applicable (e.g., a rental property).

When the donee disposes of the property at a later date, the resulting tax implications will have to be declared in the donee’s own income tax return.

Gift of money

There is no tax payable by the donor or the donee on a gift of money to a family member.

Exception between spouses

Where a gift of property is made to a spouse or common-law partner, there is an exception to the general rule mentioned above.

Provided certain conditions are met, the disposition is made at the cost (also known as the “adjusted cost base”) of the property or, in the case of depreciable property, at the amount equivalent to the undepreciated capital cost (UCC). This exception is to the donor’s advantage since at the time of the gift there is no amount to be included in income.

In the event that the donor wishes to trigger tax consequences at the time of the donation, the donor may elect to transfer the property at fair market value rather than cost.

Attribution rules and tax on income

Once the property is transferred to another person (spouse or common-law partner or minor children), there are special rules for the taxation of income (losses) from the property and capital gains (losses) from its subsequent disposition. These are known as “attribution rules”.

Essentially, these rules are designed to prevent the transfer of property income or capital gains to a donee who is taxed at a lower rate than the donor.

As you can see, there are several tax rules involved in a gift that you should be aware of before transferring the property to avoid costly mistakes.