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Written by: Aaron Chung & Angela Li
With rising real estate prices and the ageing population in Canada, gifting real estate to family members is not uncommon. Older generations are increasingly thinking about transferring property as a gift to their loved ones.
Careful consideration should be taken before gifting property in Canada so you can avoid the potential pitfalls from a Canadian income tax perspective.
Attribution rules apply to transfer of real estate properties. For example, if you are gifting a property to a child, niece or nephew who are less than 18 years of age, any income earned from the property (i.e. rental income) will be attributed back to you until they turn 18. The same applies to a spousal transfer of property. If you transfer a property to your spouse, any income earned from the property will be attributed back to you to be included in your income.
Capital Gain Attribution
If you are gifting real estate to your child (under 18 years of age) for less than the fair market value, and your child then sells it to a third party, any capital gains or losses incurred will be attributed back to you.
If you transfer property to your spouse in Canada (or a common-law partner) and they sell it to a third party at a future date, any capital gains or losses incurred will also be attributed back to you.
Tax-Free Rollover - There is an automatic tax-free rollover of a property at a cost to a spouse or a common-law partner. You have to make an election to opt-out of this automatic tax-free rollover if you want to make use of any capital losses to offset your capital gains. If you file this election, your spouse will have an increase in their cost of the property to its current market value. You cannot make this election to trigger a loss as it will be denied.
Less Than Fair Market Value – Double Taxation
When gifting real estate to family members, if you transfer a property to a related person for consideration less than the fair market value, it may result in double taxation.
For example, if you sell a property to your daughter for $5,000 and the fair market value of the property is $400,000 and the cost of the property is $5,000, you will have deemed proceeds of $400,000. You will have a capital gain of $395,000 ($400,000 less $5,000) of which half will be taxable. However, your daughter’s cost will be $5,000 and if she sells to a third party at a later date for $400,000, tax will apply on the same gain, hence double taxation.
If you sell a property to your brother for $450,000 and the fair market value of the property is $400,000 and your cost of the property is $5,000, you will have deemed proceeds of $450,000. However, your brother will have a deemed cost of $400,000. When your brother sells the property at a future date, again there will be double taxation.
However, when gifting real estate to family members for nil consideration, there is a deemed disposition at the fair market value. The recipient will have a cost base at fair market value resulting in no double taxation.
Visit this Government of Canada web page to learn more about Transfers of Capital Property.
It is recommended that real estate should not be transferred among family members for consideration other than the fair market value. So, what are my options?
You can consider gifting cash to a spouse or a child and let the spouse or child use the cash to acquire the property from you at the fair market value.
You can also consider lending money to a spouse or a child to acquire the property from you at fair market value. Be sure the spouse or child pays you interest at a prescribed interest rate on the loan amount on or before January 30th of the following year. You must also ensure that you include the interest income in your tax return. Otherwise, you may be subject to the attribution rules mentioned above.
Principal Residence Exemption
The principal residence exemption may be available to you to avoid any capital gains tax provided you meet all the conditions. See our earlier blog for Principal Residence Exemption Guidelines.
As you can see, there are various provisions to prevent income splitting between spouses and between a parent and a child. Estate Planning should also be kept in mind when thinking about gifting real estate to family members.
Please contact Angela Li or Aaron Chung for more information or if you have any questions about the gifting of real estate to family members in Canada.
This content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.