December 20, 1999

                    Rich uncle's gift might have tax implications

                    by Terry McBride

                    Is there any tax to pay when your rich uncle includes
                    a cheque for $500 dollars with his Christmas card?

                    That depends.

                    In Canada, we have no gift taxes, no estate taxes and
                    no succession duties. But we do have income taxes.

                    *  If you are the beneficiary of a family trust and your
                    rich uncle is allocating $500 of trust income to you,
                    then you can expect his accountant to send you a T3
                    tax slip for $500 early in the new year.

                    * Or, if you are a shareholder in a family business
                    corporation, the cheque could be a dividend. In that
                    case, expect a T5 tax slip soon.

                    * If you have been a good worker for his business,
                    and this is a Christmas bonus, expect your 1999 T4
                    slip to include the $500.

                    Don't look a gift horse in the mouth. If a wealthy
                    family member has devised a clever income-splitting
                    vehicle to shift part of the income tax burden to you,
                    you have to be thankful. Pay the tax. You still get to
                    keep at least 49 per cent of that "gift."

                    Put yourself in your uncle's position. Isn't it better to
                    make gifts with before-tax dollars than with after-tax
                    dollars? If the recipient is in a lower tax bracket than
                    the donor, only the taxman loses.

                    But if there is no trust-beneficiary or
                    corporation-shareholder or employer-employee
                    relationship and your uncle is simply giving you some
                    tax-paid cash out of the goodness of his heart, you
                    do not have to report the payment on your tax return.
                    This Christmas gift may be your uncle's way of
                    distributing a little of his estate to you while he is alive
                    - so he can enjoy your smile - instead of leaving it as
                    a bequest in his will.

                    If he had not made the gift, your uncle might have
                    invested that $500 and earned, say, $30 interest, on
                    which he would pay just over $15 of income tax. If
                    you, as the recipient of the gift, turned around and
                    invested that $500 to earn $30 you might only pay
                    about $8 of tax.

                    Canada Customs and Revenue Agency (CCRA) only
                    becomes interested in this gift of tax-paid cash if the
                    recipient is a minor. Suppose the child's parents
                    decide to invest the money "in trust for" (ITF) the

                    Technically, the attribution rules require the donor
                    uncle to report the $30 interest (or dividends).

                    The only exceptions for minor children are capital
                    gains and business income which do not attribute. In
                    this situation the parent might be wise to choose an
                    international equity mutual fund that is geared for
                    growth (capital gains) rather than income.

                    If the recipient is an adult there is no attribution of
                    investment income back to the donor. Gifts of
                    tax-paid cash between adults are okay.

                    What about larger gifts of "capital property" such as
                    farmland, a cottage or shares of a company on the
                    stock market? This can get complicated. Talk to your
                    tax adviser before you make the gift.

                    Farmland may roll over tax-free to a child. But a
                    rollover could mean a missed opportunity to trigger
                    an exempt capital gain. Why not step up the Adjusted
                    Cost Base by entering into a sales agreement for the
                    full market value?

                    Be very careful when you make a gift of a cottage (or
                    Clarica shares or Manulife shares) to an adult child.
                    The donor must report any capital gain just the same
                    as if the asset were sold on the open market.

                    A gift of shares or cottage to a spouse can backfire
                    too. Even if there is a tax-free rollover, there would
                    likely be attribution of future capital gains back to the
                    donor spouse.

                    Whenever you plan to make a large gift, obtain
                    professional advice first. There are pitfalls for the