During your lifetime, you may have worked hard to save up and buy real estate, and like many people, you one day hope to leave it to your loved ones. Although there is no “gift tax” in Ontario, there are important income tax rules of which you should be aware that may result in a tax consequence depending on what and to whom you are gifting.
Whenever property is “gifted”, a capital gain or loss is calculated by determining the “Adjusted Cost Base”: calculating the value that the item is sold for minus how much you originally paid to acquire it.
Normally, if you gift real estate to any family member (related by blood, marriage, common-law partnership or adoption), you will be considered to have sold the land for fair market value, which is an estimate of what the gift would sell for in the market at the time it was gifted. If the fair market value is more than what you originally paid for the item, you will be considered to receive a capital gain which will be taxable.
On the receiving side, the receiver of your gift (the “Giftee”) also incurs a tax consequence. The Giftee will be considered to have acquired the gift at fair market value even if he or she paid nothing to acquire it. In the future, when the Giftee sells your gift, he or she may incur a capital gain depending on whether the value of the item has increased or decreased.
Although the tax consequence on gifted real estate may result in an onerous tax burden, there are several important exceptions to the general rule discussed above:
- If you gift real estate that was your principal residence, all or a portion of the gifting will be exempt from capital gains tax, depending on how many years it was your principal residence during the period you owned the property. If the real estate was also the principal residence of the Giftee, the transfer may also be tax-exempt for the Giftee. To qualify as a principal residence, there are several requirements, the most important being that you, your spouse or common-law partner or “child” (anyone dependent on you or your spouse for support and their spouse/common law partner) must have “ordinarily inhabited it”.
- If the Giftee is an adult child, he or she may have a principal residence that is different from yours. In that case, you will be taxed on your capital gain while your Giftee will not.
- If you gift real estate property to a spouse or common law partner or a “qualifying spousal trust”, you can choose to deem the value that you transferred the property to be the value at which you acquired the property. In that case, there will be no capital gain or loss, resulting in no capital gains tax.
- There is also a calculable exemption for gifted “property used for the business of farming” to your “child”.
In some cases it may be beneficial to obtain a tax benefit by donating real estate. Special tax incentives may be available:
- If you donate real estate property to Canada or one of its provinces or territories, you can claim a tax credit, which can be used to reduce the amount of tax you owe.
- If you donate real estate to a registered charity or a qualified donnee such as Canada, its provinces or territories, you can designate the Value of Disposition to be less than fair market value.
- If you gift “ecologically sensitive land” to Canada, or one of its provinces, territories, or municipalities, or a registered charity approved by the Minister of the Environment, you can claim a tax credit.
- If you gift “certified cultural property”, you can claim a tax credit.
It is important to receive professional legal and accounting advice before gifting real property in order to ensure the maximum tax benefit of doing so, and to minimize your liabilities. Contact the legal professionals at Grinhaus Law Firm today to learn more about how you can structure your estate in the most tax-efficient manner so that your family, and not the government, will be able to enjoy the fruits of your life’s work.
PLEASE NOTE: THIS IS NOT INTENDED TO BE LEGAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. IT IS IMPORTANT THAT YOU CONSULT WITH A LICENSED PROFESSIONAL.