Tax Minimization Through Gifting

From an estate planning perspective, it makes a lot of sense to give away property that would otherwise pass through probate with resulting lawyers’ fees and court costs. Those expenses reduce how much one has to give.

Property of any kind that is given away is considered by tax law to have been disposed of at fair market value. If the property has appreciated in price since acquisition, the gift can subject the donor to a capital gains tax on the difference between cost and market price. There is one major exception, however, and that is gifts made to a spouse or common law partner. Those gifts are deemed by law to be disposed of at their adjusted cost base, which is cost of purchase plus any improvements made in them.

Not all property can generate capital gains. Gifts of cash or cash-equivalents 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, though any such gift should be made carefully because 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, though there is a donation limit. If you donated certain types of capital property to a registered charity — such as a gift of shares listed on a major stock exchange, of mutual funds or of segregated funds sold by life insurance companies — you may be eligible for an inclusion rate of zero on any capital gain realized on these gifts. In addition, if you have cultural property of significance to Canada and donate it to government, then the donation is regarded as being at the property’s fair market value and no capital gains tax will be payable.

The bottom line is that giving requires not just an estimation of who should get what, but also a calculation of what it costs to give. We have the experience and expertise to help you make this important investment decision.