Area of Law: Tax Law
Answer # 188
Tax rules for gifts and inheritancesRegion: Ontario Answer # 188
There are tax rules for giving gifts while you are still alive and for leaving someone an inheritance. The law applies different rules to cash and most personal property, than to property that can have a capital gain or loss, such as stock or land. These rules may affect how you arrange your finances and property to minimize the amount of tax you pay. If you receive a gift or an inheritance you will not usually be taxed. Although there are no direct taxes on received gifts and inheritances, there are usually tax consequences for the person who gives a gift or leaves an inheritance.
Taxes on gifts
Generally, you cannot avoid paying tax by giving someone a gift. If you give your spouse or your child who is under the age of 18 a gift of cash, the income generated from the gift will still be considered part of your income for tax purposes.
If you give someone, other than a spouse, a gift of property such as land, you will be considered to have sold the land at fair market value for tax purposes. Fair market value is the estimated value that something would sell for in the market at a given time. If the fair market value is more than you paid for the item when you acquired it, you will be considered to have received a capital gain, which you will have to pay tax on.
Gifts of property to a spouse
If you give a gift of property such as jewelry or land to your spouse, you may be able to defer paying tax. If your spouse sells the property, tax will be paid by the transferring spouse on any capital gain made. The capital gain will be calculated by using your purchase price and the selling price used by your spouse. If you give a gift of farm property to a child, you may also be exempt from paying tax and should consult a tax lawyer for additional information.
Tax on property owned at time of death
There are also rules for the property that you own at the time of your death. If you own property or investments, under the law you will be considered to have sold them at fair market value just before you died. Since a tax return must be filed for the year in which you die, if the value of the property or investments has increased since you acquired them, you will be considered to have received a capital gain. Your personal representative, commonly known as your executor, will be responsible for paying tax on the capital gain by using money from your estate. There are tax rules that defer the capital gain on death if your will gifts the property to a surviving spouse.
Tax implications if you receive a gift
If you receive a gift or inheritance from someone other than a spouse, you will usually be considered to have acquired it at fair market value. In the future when you sell it, your capital gain or loss will be based on the value of the item when you acquired it.
It is very important to consider the tax consequences of gifts and inheritances before you give away your belongings. You should consult a lawyer or estate planner to minimize the amount of tax you or your family will have to pay.
For additional information on the tax rules regarding gifts and inheritances, call or visit Canada Revenue Agency.
For legal advice and assistance with tax planning, a CRA tax dispute, or other tax issues, contact Tax Chambers LLP
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