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Gifting Family & Charity

Gifts can create double taxation

It turns out that not all gifts are equal and that some gifts, say a sale of valuable property at less than fair market value, can trigger double taxation, first in the hands of the donor and then, secondly in the hands of the recipient. Therefore giving a discount to a relative on valuable property may actually create tax problems for the recipient. It is better for a donor to give property at correct value and to pay any tax due on realization of gains than to have it taxed twice!

Not all property can generate capital gains. Gifts of cash or cash-equivalents such as treasury bills cannot trigger capital gains because they produce only income. Likewise, a gift of property that generates only very small capital gains may not cause a very costly problem.

If you give away a principal residence, there should be no tax bill to pay because principal residences are considered free of capital gains tax liability. Any such gift should be made very carefully, for the recipient could turn around and turf the donor out of the house.

Giving cash or property, including stocks, to a charity can provide a current tax saving. In most provinces, including Manitoba, a charitable gift can be made in a will. The donation limit that applies in the year of death for a final return is 100% of the deceased's net income. Donation credits not used up on the final return can be carried back and used in the prior year.

In other years, the limit on donation credits one can claim is a maximum of 45% of value over $200 to a limit of 75% of net income plus 25% of capital gains arising from the gift of capital property.

Attribution rules

Income from a gift will generally be attributed back to the donor and taxed in his or her hands. There are exceptions, for a gift to a minor child will trigger attribution of income including interest, dividends, royalties and rents back to the donor. Yet capital gains are still taxed in the hands of the child. But gifts to an adult child do not trigger attribution rules.

There are serious investment implications that follow on the heels of these tax laws:

  1. Not all property generates capital gains.
  2. Some gifts can wait until a child becomes 18 and therefore be taxed in the hands of an adult responsible for paying tax on income and capital gains.
  3. A spouse or common law partner can take responsibility for capital gains on transferred property if it is conveyed at fair market value by way of a payment from the spouse or common law partner who receives it. This transfer of responsibility for capital gains tax requires that a written election be filed with the tax return indicating that the transfer is to be done at fair market value. This tactic can be used to absorb capital losses or to avoid rules that say that the spouse receiving the property at cost will have to attribute investment income back to the donor.