The Canada Revenue Agency (CRA) does not tax gifts. Gifts, along with lottery winnings, most inheritances, and life insurance payments, fall firmly on the list of items that are not taxed. However, as the giver, you may face some tax obligations.
Taxes for Gift Givers
If you give assets such as a house or shares to your child, a friend, or almost anyone else, the recipient of the gift does not have to pay any tax on the item received. However, you may face capital gains tax.
When you give away a capital asset, the CRA treats the transaction as if you have disposed of the asset for its Fair Market Value (FMV). FMV is the amount that an asset would sell for on the open market. When you file your taxes, you must report a capital gain of the difference between the asset’s and its Adjusted Cost Base (ABC). The ABC is the asset’s purchase price plus buying expenses. As of 2019, 50 percent of that amount is taxable.
Transferring Assets to Your Spouse or Common-Law Partner
In exception to the rule, if you give a capital asset to your spouse or common-law partner, you do not acquire a capital gain. However, when your spouse or common-law partner disposes of the asset, you may face capital gains at that time if you are still together.
Giving Away Small Business Shares
If you want to give someone the gift of small business corporation shares, you may be able to offset your capital gains with the lifetime capital gains exemption. The Lifetime Capital Gains Exemption (LCGE) offsets capital gains arising from the disposition of qualifying small business shares and farm or fishing property.
Additionally, if you are looking for a way to give your children small business corporation shares without facing capital gains tax, a tax advisor can help you to restructure your shares, set up a trust, and freeze your estate so that the taxes are deferred until the time of your death.
Donating Capital Assets to Charities
When you give a gift to a qualifying charity, institution, or government organization, remember to get a receipt because the CRA offers tax credits for those gifts.
The amount you can claim is noted on the receipt, and that amount equates to the FMV of the gift minus the value of any items you received in exchange. However, you may also have to report capital gains on the gift — the CRA has different expectations for different types of gifts.
The CRA has an inclusion rate of 0 percent for capital gains arising from gifts of shares, securities, options to acquire property, units of mutual fund trusts, and ecologically sensitive land.
If you give capital property such as a cottage or land to a qualifying charitable organization, you may have to report capital gains, but the CRA allows you to use an adjusted formula to calculate it. Rather than using the FMV of the asset, you may choose any figure that is less than the asset’s FMV but greater than its adjusted cost base or any items you received in exchange for the donation. This essentially allows you to avoid the capital gain.