Exemptions in gifting a large property to family members come with strings and pitfalls
Canadians that wish to transfer a principal residence to a family member may do so on a tax-free basis. However, those who want to do so must be mindful of certain legal provisions and conditions.
According to an article written by Samantha Prasad of Minden Gross LLP, someone who owns a property can transfer it to a family member on a tax-free basis for each year of ownership that they designated it as their principal residence; tax will be owed on a pro-rated basis for each year that the home was not designated properly.
To qualify as a principal residence, Prasad noted, a property must have been ordinarily inhabited by the owner, their spouse, or their child. While only one principal residence exemption is allowed per family, a second home transferred to one’s adult or married child can count as a principal residence for the child; assuming the home remains as the adult child’s principal residence going forward, any further gain on the property would be exempt as the child can claim the home as their own principal residence.
For those in Ontario, there is an opportunity to avoid triggering land transfer tax, which is based on the consideration paid by the person receiving the property. By noting the consideration as “nil” when documenting the transfer with the registry office, the one gifting the property can ensure the recipient family member won’t have to pay any cash to the province on the transfer. Gifting a property in Toronto also offers a chance to sidestep the municipal land-transfer tax, Prasad added.
“If the gifted property has a mortgage that the adult children receiving the property as a gift assume, there will be land-transfer tax (at both the Ontario and Toronto levels) on the amount of the mortgage being assumed,” she said.
Those seeking to avoiding tax on a property by transferring it to a family member, however, should be mindful of Section 160 of the Income Tax Act. Prasad said that under that section, both the gifter and the family member will be jointly and severally liable for the pre-existing tax that was payable not just for the year of the gift, but also any preceding year.
“Although this liability is limited to the extent that the fair market value of the gift exceeds the value of the consideration (usually nothing where a gift is involved), there is no limit on the interest on such tax amount for which either party would be liable,” she said.
And while Canada imposes no tax on gifts by individuals, the U.S. taxes giftors who transfer ownership of properties located in the U.S. Prasad added that those with U.S. citizens, even if they reside in Canada for tax purposes, will be subject to the U.S. gift tax rules, though there are certain annual exemptions as well as a lifetime exemption in the U.S. for gift tax.
