Gifting in Canada: Tax Implications and the Role of a Deed of Gift
Canada does not have a gift tax, unlike other jurisdictions, notably the United States. However, there are situations in which making a gift in Canada can still result in tax consequences. Gift taxes usually complement an estate tax regime and are designed to prevent avoidance of the estate tax through gifting before death.
This article explores inter vivos gifts and the taxes that may arise from them, as well as the significance of executing a Deed of Gift.
Canadian Gifts Explained: Validity, Delivery, and Tax Consequences
Canada imposes taxes on income, which must be derived from a source. For Canadian tax purposes, a source refers to some sort of organized activity that employs labour, capital, or both to generate income. Common examples of a source include a business, employment, property, or capital gains.
Income, for Canadian tax purposes, typically involves the creation of wealth that is regular and recurring. However, some receipts, for example, gifts, inheritances, windfalls, and gambling winnings, are not considered income for Canadian tax purposes.
A gift is a voluntary transfer of property from one person to another without consideration. For a gift to be valid, three elements must be present:
- An intention to make the gift;
- Delivery of the gift, or of a Deed of Gift, to the recipient; and
- Acceptance of the gift by the recipient.
If any of these elements is missing, the gift may be treated as taxable income in the hands of the taxpayer.
Business and Capital Property Gifts in Canada: Understanding Taxable Benefits and Capital Gains Implications
It is important to realize that when a gift is made in a business context or involves capital property, different tax rules apply.
Gifts in a Business Setting
A cash or near-cash gift (such as a gold ring or cryptocurrency) given to an employee constitutes a taxable benefit. Non-cash gifts are generally also taxable, except where their total value falls below the CRA’s annual de minimis threshold of $500 and the gift is unrelated to job performance.
In Wisla v. R. [2000] 1 C.T.C. 2823, the court further held that non-cash gifts are not taxable when they are not part of an arrangement intended to avoid tax or to mitigate the impact of conferring a benefit on employees.
In addition, a gift is treated as a taxable benefit to the recipient if it is provided as compensation for services rendered, given in anticipation of future business or services, or made in recognition of a business or employment relationship. In such cases, the value of the gift is subject to taxation in the hands of the recipient and is deductible to the payor.
Gifts of Capital Property
A gift of capital property (such as real estate, shares, bonds, patents, or trademarks) makes the donor liable for capital gains tax if the asset has appreciated, while the recipient receives the property entirely tax-free.
This occurs because a gift is considered a disposition of capital property under Section 69(1) of the Income Tax Act. The disposition is deemed to take place at fair market value at the time of transfer, which may result in a substantial tax liability for the donor. This fair market value also becomes the cost of the property to the recipient.
The donor must report any resulting gain or loss on the donor’s tax return for the year. There are, however, certain exceptions. For example, the donor may transfer capital property to a spouse at the donor’s original cost base, without any immediate tax consequence, until the spouse disposes of the property.
A similar rule applies when the donor transfers capital assets to a company; the donor may make use of section 85 of the Income Tax Act and elect the amount for the transfer, subject to certain rules.
The Role of a Deed of Gift in Protecting Property Transfers
A Deed of Gift is important because it provides written evidence of the gift and ensures that all elements of a valid gift are documented. Like any other undocumented transaction, a gift that is not made in writing is vulnerable to challenge.
A Deed of Gift also allows the donor to specify how the gift should be used by the recipient, helping to prevent misappropriation. However, there are risks that such gifts may be treated as a trust or conditional disposition, if they are not carefully worded.
A well-drafted Deed of Gift should clearly reflect all the essential elements of a valid gift, including the voluntary nature of the transfer, the donor’s legal capacity and ownership of the gifted property, and the authenticity of the gift itself. It should contain key details such as the date of the gift, the addresses and relationship of the parties, the identity and residence of the parties, the intention behind the transfer, a description of the gifted property, and the signatures of the parties involved.
It is particularly important for a Canadian resident receiving a gift from a non-resident to properly document the transfer through a Deed of Gift and to retain supporting records that substantiate the transaction. These may include documentation relating to the source of the gift and the circumstances surrounding it.
Failure to maintain adequate records may result in the gift being treated as unreported income or undisclosed foreign assets, potentially leading to CRA audits, penalties, and interest charges. Gifts may also be made to settle estate matters or strategically transferred to a trust for estate tax planning purposes.
Pro Tax Tips: Why Even Simple Gifts May Require Expert Tax Guidance in Canada
Even a simple gift may require expert advice from a Canadian tax lawyer, especially when the gift forms part of a tax plan or structure. Legal guidance is often necessary to draft the language of a Deed of Gift, ensuring that the donor’s intentions are fully realized.
Certain gifts may also qualify for tax credits. For example, gifts made to a qualified donee—such as a registered charity or municipality—entitle the donor to gift tax credits, which can be used to reduce tax liabilities. The credit is calculated as the fair market value of the gift, minus any advantages received from the recipient as a result of the gift.
Taxpayers should also ensure to file a Form T1135 – Foreign Income Verification Statement with the CRA, where the cost of their foreign assets exceeds $100,000 as a result of the taxpayer’s receipt of a gift.
The above highlights the importance of seeking expert advice, even for seemingly simple gifts. Our team of experienced Canadian tax lawyers are available to provide the guidance needed to navigate these rules effectively.
Frequently Asked Questions (FAQs):
What types of income are taxable in Canada?
Taxable income in Canada must be derived from a source, which involves organized activity using labour, capital, or both to generate income. Common examples include business, employment, property, or capital gains. Gifts, inheritances, windfalls, and gambling winnings are not considered income for tax purposes.
How are gifts treated in a business context in Canada?
In a business context, cash or near-cash gifts to employees are taxable benefits. Non-cash gifts are also generally taxable unless they are not part of a tax avoidance arrangement. Gifts given as compensation, in anticipation of services, or in recognition of a business relationship are subject to taxation.
Does Canada have a gift tax?
No, Canada does not have a gift tax. However, certain gifts may still result in tax consequences depending on the context.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.