One would think that it would be very simple to know whether someone had given you a gift. Not necessarily. It is amazing how easily there can be a difference of opinion on the topic. Consider the following example – Mom and Dad gave $100,000 to Child 1. Mom and Dad subsequently died, and Child 1, 2, and 3 were to share equally in the estate. Here is an example conversation about the $100,000:
Child 1 – “It was a gift.”
Child 2 – “No it wasn’t. You were supposed to pay Mom and Dad back!”
Child 3 – “You were not supposed to get the money until Mom and Dad died. The only reason you got it early is because you told them a sob story. The $100,000 is supposed to be subtracted from your inheritance.”
Really glad I am not the executor of this estate!
The moral of the story: be clear and put your intention in writing.
For example, you may wish to prepare a “deed” or “statement” of gift which sets out the intention for the gift (i.e., is it a gift? Is it an advance on an inheritance?). It is also prudent to consider having the recipient of the gift acknowledge receipt.
What are the tax ramifications of a gift?
Unlike the United States, there is no gift tax or inheritance tax in Canada. However, there are still a few key tax considerations to keep in mind:
- The Income Tax Act (Canada) deems a gift of capital property to be made at fair market value. What does this mean? Well, if you own a cabin that you paid $100,000 for, and you gift it to your child, you will be taxed on the difference between $100,000 and the current fair market value of the property – regardless of whether the child actually paid anything for the property.
- There are certain exceptions to this rule for farm and fishing property.
- The age and residency of the gift recipient can also have an impact on the tax result.
- Keep in mind that once the recipient receives the gift, it is now their property and the subsequent increase in value of the property (and/or subsequent sale) is taxed in the hands of that person.
What are some of the non-tax considerations of giving a gift?
Tax is important but is not the only consideration when giving a gift, and/or when planning your estate. Here are some other considerations to keep in mind:
- What impact (if any) will the gift have on the recipient’s entitlement to social assistance benefits?
- Are there conditions placed on the gift? If so, how are you communicating those conditions and what happens if the conditions are not met?
- Does the gift also impose the potential for a future expense? For example, in the cabin example noted earlier, someone is going to have to pay property taxes and upkeep on the cabin – who bears that responsibility and where are the funds coming from to make those payments?
- Are you giving the same gift to more than one person? For example, are you giving the cabin to two of your children? If so, how are they going to make decisions about the usage of the cabin? What happens if one of them dies? What happens if one of them ends up divorcing their spouse – does the cabin form part of family property division on a separation?
Parting words of wisdom
Gift giving is not as simple as it appears.
For large gifts that are part of the overall estate plan, it is advisable to have a chat with your advisor to discuss your intent and what documentation (if any) should be prepared in conjunction with the gift. In addition, advice should be sought on whether there are any tax consequences to you (or the recipient) for the gift in advance of completing the gift.
This article is provided for general informational purposes only and does not constitute legal or other professional advice.
This article was originally published in The Western Producer on March 3, 2022.