Receiving a gift or inheritance can feel like a financial blessing. But, as with most things in Canadian tax, there are a few “yes, but…” moments.
The good news? Canada does not have a general gift tax.
The not-so-fun news? Certain gifts can still create tax problems depending on who gives the gift, what is being gifted, and whether the person giving the gift owes money to CRA.
Let’s break it down.
1. There Is No Gift Tax in Canada
In Canada, if you receive a gift or inheritance, it generally does not have to be included it in your income.
That applies whether the amount is small or large.
So, if a parent, grandparent, friend, or relative gives you money, that gift is generally not taxable to you.
However, there are important exceptions.
A gift may create tax issues if:
- It comes from your employer
- It is received as a tip or gratuity because of your employment
- It is gifted to a spouse or related minor child
- It involves capital property, such as real estate or investments
- It comes from someone who owes money to Canada Revenue Agency
In other words, the gift itself may not be taxable to the person receiving it, but the story does not always end there. Tax rules love plot twists.
2. Gifts or Loans to a Spouse or Related Minor Child
If you give or loan money or property to your spouse or a related minor child, attribution rules may apply.
This means that if the gift or loan earns income, that income may be attributed back to the person who gave the gift or made the loan.
For example, if money is gifted to a spouse and that money earns investment income, the income may still be taxed in the hands of the person who made the gift.
This is an area where proper tax advice is important before moving money or investments between family members.
3. Gifting Capital Property Is Treated Like a Sale
Capital property includes things like:
- Real estate
- Investments
- Land
- Other property that may increase in value
If you gift capital property to someone, CRA generally treats you as if you sold the property at its fair market value.
That means the person giving the gift may have to report a capital gain and pay tax on it.
The fair market value becomes the cost of the property to the person receiving the gift.
For example, if you gift land, shares, or investments that have gone up in value, you may trigger a taxable capital gain even though you did not receive cash.
That can be a nasty surprise. It is a bit like giving someone a birthday cake and then CRA shows up asking who paid for the oven.
Before gifting capital property, speak with a professional tax advisor. In some cases, gifting a portion of the property over a few years may help limit the amount of capital gain reported in one year.
4. Selling Capital Property to a Non-Arm’s Length Person for Less Than Market Value
Things can get complicated when capital property is sold to a non-arm’s length person for less than fair market value.
A non-arm’s length person usually includes someone related to you or someone with whom you do not deal independently.
Under subsection 69(1) of the Income Tax Act, if a taxpayer disposes of property to a non-arm’s length person for no proceeds or for proceeds less than fair market value, the seller may be deemed to have received proceeds equal to fair market value.
However, the buyer may not always get a cost base equal to fair market value.
That can create a double-tax problem.
Example
Taxpayer A and Taxpayer B are considered not to be dealing at arm’s length.
Taxpayer A transfers capital property with a fair market value of $10,000 to Taxpayer B for $1, simply to make the agreement legally binding.
CRA may consider this to be a gift.
If it is treated as a gift:
- Taxpayer A may be deemed to have received proceeds of $10,000
- Taxpayer B may be deemed to have acquired the property for $10,000
But if CRA treats the transaction as a sale for inadequate consideration instead of a gift:
- Taxpayer A may still be deemed to have proceeds of $10,000
- Taxpayer B may only have a cost of $1
That difference can result in double taxation.
If Taxpayer A sold the property to Taxpayer B for $12,000, and the fair market value was $10,000, the buyer’s acquisition cost may be deemed to be $10,000, while the seller’s proceeds remain $12,000.
Tax Tip
If you plan to gift capital property or transfer it for less than market value, get professional tax advice first. This is not the place for “I saw a guy on Facebook say it was fine” tax planning.
5. Gifts From an Employer May Be a Taxable Benefit
Gifts from an employer to an employee are often considered taxable benefits.
CRA has administrative policies for certain gifts, awards, and long-service awards. Some non-cash gifts and awards may not be taxable if they meet specific conditions.
However, these policies do not apply to non-arm’s length employees, such as:
- A relative
- A shareholder
- A person related to a shareholder
Gifts and awards to non-arm’s length employees are taxable.
Non-Cash Gifts and Awards
A non-cash gift or award may not be taxable if it is for something like:
- A religious holiday
- A birthday
- A wedding
- The birth of a child
- An employment-related accomplishment, such as outstanding service or employee suggestions
For an award to qualify as non-taxable, it generally needs clear criteria, a nomination and evaluation process, and a limited number of recipients.
A non-cash gift or award may be non-taxable if the combined fair market value of all non-cash gifts and awards to the employee in the year is $500 or less, including taxes.
The $500 limit does not include:
- Small or trivial items such as coffee, tea, T-shirts, mugs, plaques, or trophies
- Long-service awards
6. Long-Service Awards
A long-service award may not be taxable if all of the following apply:
- It is a non-cash gift or award
- It is not a gift card
- It recognizes 5 or more years of service
- At least 5 years have passed since the last long-service award was given to that employee
- The fair market value is $500 or less, including taxes
If the gift or award does not meet the required conditions, it is a taxable benefit and the fair market value must be included in the employee’s income.
Performance-related rewards are taxable benefits.
Cash and near-cash gifts are also taxable.
This includes reimbursements where an employee buys something, submits a receipt, and receives cash or a cheque in return.
Near-cash items include:
- Bonds
- Securities
- Precious metals or jewels
- Gift cards that do not meet all conditions to be treated as non-cash
- Prepaid cards issued by financial institutions
- Digital currency
7. Capital Property Owned at Death
There can be tax consequences when a deceased taxpayer owns capital property at death.
This is different from simply receiving an inheritance.
The person receiving the inheritance may not pay tax on the inheritance itself, but the deceased person’s estate may have tax to deal with, especially if capital property has increased in value.
This is why estate planning is important. A will can pass along assets, but tax planning helps avoid unnecessary surprises.
8. Gifts From Someone Who Owes Money to CRA
This is a big one.
Under section 160 of the Income Tax Act, if a tax debtor transfers cash or other property, directly or indirectly, to certain people, the recipient may become liable for the tax debt.
This can apply when property is transferred to:
- A spouse or common-law partner
- Someone who later becomes a spouse or common-law partner
- A person under 18 years old
- A person with whom the tax debtor is not dealing at arm’s length
The recipient can be held liable for the outstanding tax debt of the person who made the transfer.
The liability can be up to the fair market value of the property received, minus the fair market value of anything given in return.
This rule may apply in situations such as:
- A spouse transferring their interest in the family home to the other spouse
- A private corporation paying dividends while it has an outstanding tax liability
So, receiving a gift from someone who owes CRA money can come with strings attached. And those strings may be tied directly to CRA’s collection department. Not exactly the kind of gift wrap anyone wants.
Final Thoughts
In Canada, there is generally no tax on receiving a gift or inheritance.
But the tax result depends on the details.
Before making or receiving a large gift, especially where capital property, family members, corporations, employers, or CRA debts are involved, it is smart to get professional advice.
