How Gifts Are Taxed In Canada
DISCLAIMER
This information is intended for business owners in Canada and serves as general guidance only. Always consult with a qualified advisor before making any legal decision.
In this article, we’ll cover the following topics:
What is income?
What is a gift?
How are gifts taxed?
Exceptions to gift taxation
Gifts from employers to employees
Gifts of capital property
Gift tax credits
What is income?
Before we discuss gifts and how they’re taxed, we need to first define income.
Vern Krishna, a leading Canada tax lawyer, defined income succinctly as a “measure of gain that derives from capital, from labor, or from both combined.”
Courts recognize income as having six characteristics:
Income is distinct from capital
Income is usually recurring and regular
The amount that the taxpayer received must belong to the taxpayer
The receipt must be income in the taxpayer's hands
The gain must be convertible into money
Only nominal gains are recognized
As for when income is taxable, the shortest answer is always.
Sections 81 and 12 of the Income Tax Act drill deep into what is included or excluded in the calculation of income, while subsections 2(1) and 2(2) read more like commandments:
“An income tax shall be paid on the taxable income for each taxation year of every person resident in Canada at any time in the year… taxable income of a taxpayer for a taxation year is the taxpayer's income for the year plus the additions and minus the deductions permitted by Division C.”
There is only one way to interpret this: if it’s income, Canadians must pay tax on it.
What is a gift?
A gift is a voluntary transfer of property from one person to another without consideration. The key terms here are voluntary and without consideration.
In Bellingham v Canada, the Federal Court of Appeal stated that a gift must be a “voluntary and gratuitous transfer of property.” In other words, a gift is only considered to be a gift when it is given freely, without expectation of a reward or bound by any contractual obligations.
How are gifts taxed?
In Canada, the general rule of thumb is that there is no tax on gifts. The Federal Court of Appeal has made it clear that because gifts represent non-recurring transfers of property, they are generally not considered income, which means that they are not taxable. Income involves the creation of new wealth, which is taxed, while gifts involve the transfer of old wealth, which is not taxed.
However, there are a few important exceptions to this rule, which we’ll discuss below.
Gifts from employers to employees
In most cases, a gift given to an employee from their employer is considered to be income, which, as we’ve already discussed, means it’s taxable. This is true for both cash and non-cash gifts, but the CRA only considers these kinds of gifts to be taxable income if their value is more than $500.
If your employer buys you a cup of coffee, it’s (legally speaking) not a gift. If your employer gives you a gold Rolex watch when you retire, it’s almost certainly considered to be taxable income.
Gifts of capital property
If you’re gifted capital property (i.e. real estate, shares, patents, trademarks) you won’t need to pay taxes on it, but the gift donor likely will. This is standard procedure when it comes to capital gains taxation – if you give away a piece of capital property, you need to report any capital gain or loss on your income tax return.
However, this does not apply if the capital property was gifted from someone to their spouse - a spousal rollover applies and so the recipient will inherit the original cost base (or ‘adjusted cost base’ - ACB) of the item … meaning that if and when the recipient gifts/sells the property, then they will pay tax on the difference between the fair market value and the ACB at the time of the disposition.
Capital gains tax may also be deferred using the Section 85 rollover. As we discussed in “Section 85 Rollover: How It Benefits Canadian Businesses,” the Section 85 rollover is a mechanism under the Income Tax Act that allows taxpayers to transfer eligible property to another entity, usually a corporation, without the transfer resulting in an immediate personal tax liability. Used most often by small business owners who are operating as sole proprietors of their businesses and whose sole proprietorship has significant value, Section 85 rollovers allow sole proprietors to transfer properties on a tax-deferred basis, without realizing any sort of taxable gain on the transfer of property.
