Tax On Gifts & Inheritances

by Tax Guy - Burlington Accountant on February 19, 2011 Print This Post Print This Post

Gifts, inheritances, and windfall gains from lotteries or other gambling are generally not taxable when received in Canada.

The amounts you receive as gifts, inheritances or windfalls are considered to have been paid from after tax income and would result in double taxation if taxed again. However, like many things in the tax world, there are exceptions to this rule.

RRSP Direct Designations

If you received an inheritance from an RRSP or RRIF through a direct beneficiary designation and the estate of the deceased was unable to pay the income tax bill, you may be held liable for the proportion of income tax that would have otherwise been paid by the estate.

For those making direct beneficiary designations, be aware that you should leave some assets to your estate to allow your executor to pay the final tax bill and other expenses due upon death.

Possible Income Splitting

Under certain circumstances income generated from gifts to your children or spouse may be taxed in your hands. If you leave gifts to children in your Will using a trust, you may be able to leave not only a legacy, but also allow them to income split with your estate.

Contact me to find out how I can help you file the final tax returns for an estate and minimize taxes by taking advantage of all tax planning opportunities.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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{ 14 comments }

Grace Clarke March 24, 2012 at 3:23 pm

I would like to leave my son a house in Saskatchewan that is under $10,000 value as a gift and would like to sign over the deed to him right away. Can this be done and how? Is there tax due on giving a gift like this?

Tax Guy March 24, 2012 at 6:25 pm

If the house is your principal residence, there is no income tax. There may be land transfer taxes and legal fees.

Steve April 5, 2012 at 10:56 pm

Dean,
If I were left money from my grandmother in her will or RRSP, if I take the lump sum, do I pay tax immediately on that amount for withdrawing it?
If the money were simply in her chequing account, and I was given a cheque for it, as it is an inheritance, do I have to pay income tax on that amount, or is it simply a gift and can simply deposit it in my bank.
Lastly, a US IRA, I know I would have to pay 30% withholding tax on, but taking the lump sum, isn’t that considered an inheritance as well? If I’ve paid the tax in the US, do I also have to pay income tax on it in Canada?

Tax Guy April 6, 2012 at 3:35 pm

Steve,
As a general rule, gifts and inheritances are not taxable to the recipient. This is because the person making the gift (including a deceased person) pays any taxes that come due from making the gift. Like most things there are exceptions. If a person name beneficiaries directly on their RRSP’s and RRIF’s and has all other assets in joint ownership, then nothing passes to the estate and the estate can’t pay the tax bill that is due (naming beneficiaries and changing ownership to joint does not avoid the income tax). In these cases the CRA can and will go after the beneficiaries for the tax that would have otherwise been paid. This is logical, because the bene got a pre-tax instead of after tax gift.

With the IRA, these are taxable in the hands of the beneficiary when withdrawn from the plan. This is because of the tax treaty which allows Canada to tax the withdrawal on the grounds that that is the treatment in the U.S. This is logical because the U.S. taxes the beneficiary and if the bene is a Canadian, there is the 30% withholding tax. If Canada did not tax that amount, there would be no foreign tax credit or deduction available (yes, you could file a 1040, but the cost and headache to do so could be more than the amount you would get back … in my practice I charge $250 per hour plus disbursements. Depending on the nature of the work involved, you are looking at, bare minimum $500 to prepare the 1040.

Justin November 29, 2012 at 3:56 pm

My in laws are planning to give to my wife and i their rental property as a wedding gift. approximately worth 500 000

What exactly am i looking at with regards with taxes, transfer taxes etc.

How would i be able to minimalize the taxes for both my in laws and I?

Thanks!

Burlington Accountant November 29, 2012 at 4:52 pm

Good news for you is that gifts are not taxable. However, you will likely have legal fees and land transfer fees. If you rent the property after you take possession, you’ll have rental income.

For the in-laws, the transfer of ownership under section 69(1) means that the transaction is deemed to occur at fair market value. You acquire it at its current fair market value and the in-laws are seemed to have sold it at its fair market value. The ensuing taxable capital gain is to be reported by the in-laws (or the “actual owner”).

There are some strategies that may be employed but would involve you paying for the house.

Karen February 4, 2013 at 2:38 pm

My mother is aging and has named me as her sole beneficiary in her will and all investments. She has a $350K condo, $20K in mutual funds (some in RRIFs, some unregistered), savings accounts, and a car. The challenge is that I am a Canadian non-resident living abroad for the last 10 years in a country with no tax treaty.

On her passing, how would my non-resident status affect taxation of the estate/inheritance? I assume by selling the house immediately I’d minimize net cap gains, but her RRIFs and mutual funds would be taxed on death as they cannot be transferred to a non-resident. Would there be any advantage to gradually converting or cashing these investments before her passing?

Alternatively, if upon her death I were to immediately return to Canada and live in the house, would it allow her property and investments to be transferred without taxation to my person? I would begin filing Canadian taxes as a permanent resident at the end of the year. Would I be able to sell the house or investments before that time without incurring non-resident withholding tax?

My aim is to compare the costs of return vs. maintaining non-residency abroad upon her passing so as to start planning.

Burlington Accountant February 4, 2013 at 2:56 pm

Your status as a beneficiary has no bearing on the estate. You mom’s estate would be responsible for the taxes due on death and anything left over would be distributed.

If you are the executor, then that is a whole new can of worms since it could affect the overall estate as well as your ability to even manage it. If you are also the executor, you should see a Canadian lawyer.

Margret February 13, 2013 at 10:54 pm

I am a Canadian citizen and resident. My sons live in the US and I want to give them each a substantial gift of money from selling my home in Canada. Will these gifts be taxed in the US?

Lindy March 3, 2013 at 1:55 am

As far as I know US citizens can receive $13,000 gift per year without paying taxes from a person. You could possibly give $13,000 to each of their wives and to to each of their children per year. I would double check this of course, before going forward. Lucky sons!!! ;-) Great Mom!!!

Matthew Hill March 10, 2013 at 6:29 pm

For many years I have collected tribal art in a small way (never paying more than around $100). I recently bought at a thrift shop an item which proved to have
disappeared from a large museum decades ago. Learning that I had it, the museum claimed it back. Eventually a settlement was arrived at between our lawyers by which the museum gave me many times the amount I paid for the item to relinquish my claims to it.
What is my tax position re this amount?

Tax Guy - Burlington Accountant March 10, 2013 at 6:40 pm

The sale is a capital gain on listed personal property.

j.forbes March 11, 2013 at 4:48 pm

My Father is wanting to give me some money from the sale of his mother house in the UK. He is a British citizen as am I. I also have permanent residency status in Canada, NS. As I am working and living in Canada but the monies being gifted to me are from the UK will they be liable to tax in Canada? The amount is the re region of $155,000 CAD

Mia April 29, 2013 at 1:46 am

My question is about Tax On Gifts. I am a Canadian citizen and resident. If I receive a real estate property as a gift (in US or even Canada) from an American citizen, is that taxable? How about receiving cash gift from an American citizen?
I would really appreciate it to find out. Thank you.

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