Planning on leaving a large gift to your children or grandchildren? If it includes property or securities, there may be tax implications to keep in mind. Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Greg Bonnell to discuss what Canadians should know and ways you may be able to reduce the tax impact.
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* Today on Ask MoneyTalk, we answer a question we're hearing around tax rules for large gifts. Nicole Ewing, Director of Tax and Estate Planning at TD Wealth, joins me now to weigh in. So here's the question for you, Nicole: When do you have to pay capital gains tax on gifts?
* Well, the great news is never. [LAUGHS] So the individual who is making the gift is always the one who's responsible for the tax on it, so the recipient is receiving their gift free of tax. The person who's giving the gift is going to be deemed to have sold it for tax purposes.
- They've disposed of it for fair market value and they will be responsible to pay the tax on the difference between the fair market value and the cost base. That difference will be included in their income at the relevant capital gains rate.
- And if they are-- if the asset is owned by two people-- perhaps it's a spouse, and they're jointly gifting the asset to an adult child, for example-- both of them would be responsible for including 50% of that gain in their taxes and ultimately paying tax at their individual marginal rates.
* I'm thinking of my own life, when that time comes when I might want to give my sons a gift. There's different kinds of things, right? It might be property. It might be securities. It might be cash. Is there a difference between these?
* Very much so. So cash-- ultimately, there is no tax payable on cash. When I transfer, hand it over, yes, I've disposed of it. But essentially, the value-- the fair market value and the cost base is essentially the same, so we don't have to pay tax on cash gifts.
- If, however, we are giving an interest in a property, a real property, or if we are gifting over securities of some kind, then yes, there is going to be a deemed disposition, and you will have a tax payable on that.
- Now, keeping in mind, some people try to do something cute where they sell the asset to the family member for less than fair market value, and so they don't need to pay the full amount of the tax. That is not the case.
- It's actually a very, very negative tax result because the individual who has made that sale for less than fair market value to a family member will be deemed to have sold it for fair market value, so they'll be taxed on that full amount.
- The recipient of that gift will take-- their new cost base on that is going to be the amount they actually paid, which is $1. When they eventually dispose of that asset, they're going to need to pay tax on the same gain that has already been paid by the person who gifted it to them.
- So you're essentially paying tax twice on the same amount. So gift or sell at fair market value, but nowhere in between.
* That is an important point to know and to understand. So the liability on the giver, if there is a tax implication, anything you can do to reduce those tax implications?
* Oh, certainly. We may want to stagger the gift and maybe give an interest of a certain percentage of the asset over a period of years. Depending on whether there is a prenup in place, depending on other sorts of relationship considerations, you may choose to make that gift to spouses.
- So if you're gifting it to your child and their spouse, ultimately, then you're accessing those income splitting opportunities where if they eventually dispose of that gift, they are able to each only include 50% of it in their income.
- And then ultimately, really, it's the recipient who has the opportunity to shelter some of that future gain from tax by either investing those funds into a registered account or otherwise making sure that they're making tax-efficient decisions.
* All right. You've clearly laid out the things we need to think about here, but when one finds themselves in this situation, I imagine it can get complicated. You might want to talk to somebody.
* And depending, if we're talking about very large gifts here, then yes, I would seek counsel from a lawyer. Make sure that you have the appropriate documentation in place to confirm that this is a gift. You may want to have a deed of gift document and coordinate that, perhaps, also with the accountant and your investment advisors as well.
- So have everyone working as a team to make sure you truly understand what the tax implications are and how to protect everyone legally.
* Always an illuminating conversation. Thanks for that.
* My pleasure.
* Nicole Ewing, Director of Tax and Estate Planning at TD Wealth. And if you have a question, send it to MoneyTalk@TD.com.
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* Well, the great news is never. [LAUGHS] So the individual who is making the gift is always the one who's responsible for the tax on it, so the recipient is receiving their gift free of tax. The person who's giving the gift is going to be deemed to have sold it for tax purposes.
- They've disposed of it for fair market value and they will be responsible to pay the tax on the difference between the fair market value and the cost base. That difference will be included in their income at the relevant capital gains rate.
- And if they are-- if the asset is owned by two people-- perhaps it's a spouse, and they're jointly gifting the asset to an adult child, for example-- both of them would be responsible for including 50% of that gain in their taxes and ultimately paying tax at their individual marginal rates.
* I'm thinking of my own life, when that time comes when I might want to give my sons a gift. There's different kinds of things, right? It might be property. It might be securities. It might be cash. Is there a difference between these?
* Very much so. So cash-- ultimately, there is no tax payable on cash. When I transfer, hand it over, yes, I've disposed of it. But essentially, the value-- the fair market value and the cost base is essentially the same, so we don't have to pay tax on cash gifts.
- If, however, we are giving an interest in a property, a real property, or if we are gifting over securities of some kind, then yes, there is going to be a deemed disposition, and you will have a tax payable on that.
- Now, keeping in mind, some people try to do something cute where they sell the asset to the family member for less than fair market value, and so they don't need to pay the full amount of the tax. That is not the case.
- It's actually a very, very negative tax result because the individual who has made that sale for less than fair market value to a family member will be deemed to have sold it for fair market value, so they'll be taxed on that full amount.
- The recipient of that gift will take-- their new cost base on that is going to be the amount they actually paid, which is $1. When they eventually dispose of that asset, they're going to need to pay tax on the same gain that has already been paid by the person who gifted it to them.
- So you're essentially paying tax twice on the same amount. So gift or sell at fair market value, but nowhere in between.
* That is an important point to know and to understand. So the liability on the giver, if there is a tax implication, anything you can do to reduce those tax implications?
* Oh, certainly. We may want to stagger the gift and maybe give an interest of a certain percentage of the asset over a period of years. Depending on whether there is a prenup in place, depending on other sorts of relationship considerations, you may choose to make that gift to spouses.
- So if you're gifting it to your child and their spouse, ultimately, then you're accessing those income splitting opportunities where if they eventually dispose of that gift, they are able to each only include 50% of it in their income.
- And then ultimately, really, it's the recipient who has the opportunity to shelter some of that future gain from tax by either investing those funds into a registered account or otherwise making sure that they're making tax-efficient decisions.
* All right. You've clearly laid out the things we need to think about here, but when one finds themselves in this situation, I imagine it can get complicated. You might want to talk to somebody.
* And depending, if we're talking about very large gifts here, then yes, I would seek counsel from a lawyer. Make sure that you have the appropriate documentation in place to confirm that this is a gift. You may want to have a deed of gift document and coordinate that, perhaps, also with the accountant and your investment advisors as well.
- So have everyone working as a team to make sure you truly understand what the tax implications are and how to protect everyone legally.
* Always an illuminating conversation. Thanks for that.
* My pleasure.
* Nicole Ewing, Director of Tax and Estate Planning at TD Wealth. And if you have a question, send it to MoneyTalk@TD.com.
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