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