Do you ever worry about the tax bill that can be attached to a gift of personal property?
A reader recently asked this question:
Will there be any tax consequences if I transfer ownership of my boat to my father?
Any property owned by a taxpayer and is used mainly for the personal enjoyment of the taxpayer, or for the enjoyment of those who are related to the taxpayer is called personal use property. Essentially, personal use properties are assets of an individual that have value but are not used to earn income. This includes boats, vacation homes, furniture, or personal automobiles.
The sale or disposition of personal use properties results in taxable capital gain. That is to say, that ½ of the resultant gain is included in income for the tax year. However, there are a couple of important distinctions that treat gains and losses on the dispositions of personal use property different than other types of capital properties.
When a gain is realized form the sale of personal use property the Income Tax Act provides that the proceeds of the sale are deemed to be the greater of $1,000 or the amount of the actual proceeds. Similarly the adjusted cost base is deemed to be the greater of $1,000 and the actual proceeds of disposition. These rules effectively ensure that larger gains are taxes and small transactions are excluded from taxation.
James sells personal use property for $2,000 that he originally paid $800 for.
Tax Consequences: James will have a taxable capital gain of:
½ x ($2,000 – $1,000) = $500
Under the personal use property rules losses are not deductible against any other capital property (including other personal use properties) and thus may not be carried forward.
Listed Personal Property
Listed personal property is a form of personal use property but is specifically defined under the Income Tax Act as
- (a) a print, etching, drawing, painting, sculpture, or other similar work of art;
- (b) jewellery;
- (c) a rare folio, manuscript, or book;
- (d) stamps; or
- (e) coins.
The rules that apply to personal use property also apply to listed personal property, specifically the $1,000 rules for proceeds of disposition and the adjusted cost base. However, the Income Tax Ax Act does permit allowable capital losses on listed personal property. These deductions can only be used against gains from the disposition of listed personal property and cannot be used against other property.
In the above situation, if boat was provided to the family member as a gift the proceeds of disposition would be the value of the boat on the date the asset was given to the father. Since most personal use property will lose value over time there would be a deemed capital loss of nil to the son. There would then be no tax consequences to either the son or the father.