It has become increasingly common for parents to give gifts to their children during their lifetime rather than leaving it in a Will. Whether motivated by a desire to view the recipient enjoy the benefits of the gift during the lifetime of the giver, or by the circumstances of the recipient (e.g., a child needs to move out, buy a house, or attend university), gifts made during the lifetime of the giver warrant specific consideration.

Inter vivos vs. testamentary gifts

Gifts made during the lifetime of the giver are called “inter vivos” gifts. Gifts made by Will are referred to as “testamentary” gifts.

Is there a tax on gifts in Canada?

There is no tax on gifts in Canada, either to the giver or to the recipient. However, there may still be tax consequences to making gifts. The most common consequence is that when an asset – such as stock, real property, or even art – is gifted, the item is deemed to have disposed of by the giver at fair market value. Tax will apply to the increase in value, if any, of the asset. In general, the giver of the gift will be liable for tax on half the value of the increase at their marginal tax rate.

One potential advantage to an inter vivos gift is that, generally, any further appreciation of the asset is deferred until the beneficiary disposes of the asset. An inter vivos gift may be appropriate as part of estate planning in situations where the asset is likely to increase further in value.

To avoid adverse tax consequences property should not be sold to the recipient at a price below fair market value. This may result in double tax as the giver’s sale price will be based on fair value whereas the recipient will have a low tax cost equal to the price paid.

Inter vivos gifts as a means to avoid probate fees

Consider the motivation behind making inter vivos gifts carefully. While such gifts are appropriate when made out of a genuine desire to permit the recipient to have the asset, they may not be appropriate as a means to avoid probate fees. Gifting assets during the lifetime of a testator or setting up joint accounts as a means of avoiding probate fees may have unintended results, complicate the administration of an estate, incur unwanted taxes, and/or result in a disproportionate distribution of assets. Also, commencing in 2023, it may also require compliance with the new “trust reporting rules”.  It should be noted that there has been a great deal of litigation regarding gifts made to avoid probate, which is time consuming and expensive, so any attempts to reduce probate fees should be planned and documented appropriately.

For further information or to plan appropriately for inter vivos gifts please consult a TEP.