Receiving a gift or an inheritance often gives a person a financial boost. Unfortunately these windfalls often come with tax consequences.
In terms of inheritance, Canada doesn’t have an inheritance tax but there are still tax consequences when a person passes away that affects the estate of the deceased.
In Canada, there are specific rules about what is taxable and what is not taxable when it comes to gifts. For example, cash gifts are taxed differently than receiving the gift of land.
If you receive a gift from an employer it is considered a taxable benefit from employment. It doesn’t matter in what form that gift comes, whether you get cash, near-cash or non-cash items.
A near-cash item is defined as something that acts like cash, such as: gift certificates, a gift card, or something that can be easily converted to cash like jewellery.
There is a distinction between when you receive something from work and whether it is a gift or an award. A gift is something you receive for a special occasion. For example, a birthday, a religious holiday, a wedding or the birth of a child. An award is something that you receive when you have an employment-related accomplishment, such as an outstanding performance.
If you get or receive land from anyone other than a spouse, then tax consequences will be triggered. The land will be considered to have been sold at fair market value and you may have to pay capital gains tax on it. Usually if the gift of land or jewellery is given to a spouse you should be able to defer the tax.
However, if anyone other than your spouse gives you a gift then you may be deemed to have received it at fair market value. This especially affects gifts that are larger in value, for instance, if the gift of a house is given.
In Canada, when a person dies, he or she is deemed to have disposed of property, even though no sale took place. The deceased is going to be deemed to have received a certain amount for the disposition of property, which triggers tax consequences.
When a person dies, their estate is responsible for any and all taxes still owed by the deceased. Death triggers the estate having to file a final return for the deceased. This requires all of the deceased’s income be reported from January first of the year up to the date of the death. If income tax is payable it’s usually paid out of the estate, meaning inheritances become smaller.
Furthermore, there are other tax consequences that can affect how much of an inheritance a beneficiary will get.
The tax rules on gifts and estate taxes, are quite complex and it’s a good idea to consult with a lawyer or an accountant when it comes to tax consequences of giving or receiving a gift. You should definitely consult with a lawyer if the issue involves an estate matter.
Rules for Gifts and Awards