Bleak house: avoid the endless tax effects of property gifts
Previously published in The Fund Library on Thursday, October 1, 2015, by tax and estate planning lawyer, Samantha Prasad.
You might think that giving generous gifts of property or other assets to family members would be fairly cut-and-dried affair. Not so. As I outlined in my previous article, the Canada Revenue Agency stands ready to take a (sizeable) piece of the action if you’re not careful about what you transfer, to whom, and how. It gets even trickier where transfers of real estate are involved. Here’s what you need to know to avoid being socked with a large tax bill as a penalty just for trying to be nice.
Principal residence transfers
You can transfer your home by gifting it, and if the home was properly designated as your principal residence for each year you owned it, the transfer will be exempt from tax. (If your home was only a principal residence for some years and not others, the portion of the exempt gain is pro-rated accordingly.)
For the home to qualify as a principal residence, you (or your spouse or child) have to have ordinarily inhabited it.
A transfer of a second home (that is, a non-principal residence) can be made to your adult and/or married child and qualify as a principal residence for the child.
Although you will be liable for any accrued gain up to the time of the transfer to your child, assuming the home remained your child’s principal residence, any further gain would be exempt.
In Ontario, one perk of gifting your principal residence to a family member is that no land transfer tax will be triggered, because this tax is based on the “consideration” paid by the person receiving the property. When documenting the transfer with the registry office, you should note that the consideration is “nil,” if it is a “gift for natural love and affection.” This way, the family member receiving the gift won’t have to cough up tax to the Ontario government on that transfer. For those living in Toronto, this is a double gift, because you will also avoid the additional municipal land transfer tax (which, when added to the provincial tax, results in double the land transfer tax).
Beware, however, of Section 160 of the Income Tax Act. That little rule is designed to prevent you from avoiding tax by transferring property to your family members. You and the family members(s) to whom you made the gift may all be liable for any pre-existing tax, not only for the year of the gift, but also any preceding year.
The tax liability is limited to the difference between the value of the consideration (usually nothing if it’s a gift) and the fair market value of the gift. Note that there is no limit on the interest on the tax owed by either party.
Canadian gift tax?
Canada’s gift tax rules were repealed back in 1971 as part of the major tax reforms of that year. The rationale behind this change was that since any accrued gains on capital assets would be taxable at death, the combination of this tax with the gift tax would result in a huge tax hit upon death.
However, the United States has not been so kind, and continues to tax gifts by any U.S. individual. Still, so long as you are not gifting property that is located in the U.S., don’t worry about gifts to family members south of the border. The U.S. gift tax will generally not apply to gifts of intangible property by a non-U .S. citizen or gifts of tangible personal property and real property by a non-U.S. citizen if the property is not located in the U.S.
If, however, you are a U.S. citizen – even if you are a resident in Canada for tax purposes – the U.S. gift tax rules will still apply to you, so make sure that you consider the U.S. rules before making any substantial gift.
Note: there are certain annual exemptions in the U.S. for gift tax, as well as a lifetime exemption.