So, while these rules may trigger a capital gain for the donor, they accordingly bump the recipient’s tax cost. The recipient, in turn, is deemed, for tax purposes, to have acquired the property at a tax cost equal to the property’s value. Therefore, if, at the time of the gift, the donor’s tax cost for the gifted property was less than the property’s value, the donor will realize a taxable capital gain. In more detail, when a taxpayer donates a capital property, the taxpayer is deemed, for tax purposes, to have received fair-market-value consideration-specifically, the fair market value of the gifted property, as determined at the time of the gift. These rules apply to gifts either between related parties (e.g., parent/child, corporation/shareholder, trust/beneficiary, etc.) or between arm’s-length parties (e.g., charitable donation).īasically, when a taxpayer gifts a capital property, the rules deem the donor to have received fair-market-value proceeds, and they deem the recipient to have acquired the property at fair-market-value cost. The capital-gains implications of a gift are set out in subparagraph 69(1)(b)(ii) and paragraph 69(1)(c) of Canada’s Income Tax Act. Tax Implications of Gifting Capital Property: Deemed Fair-Market Proceeds for Donor & Bumped Up ACB for Recipient The article concludes by providing tax tips. This article examines the tax implications of subsection 69(1) in the context of a gift and in the context a non-arm’s-length transaction that deviates from fair market value. Subsection 69(1) applies to gifts and non-arm’s-length transactions, and, for some taxpayers, it may give rise to unexpected capital-gains tax. The rule may also deem a taxpayer to have received proceeds other than the actual sale price.
Notably, subsection 69(1) of the Income Tax Act may stipulate that a taxpayer’s ACB is an amount other than the price that the taxpayer actually paid to acquire the property. (Transaction costs would also affect the capital gain or loss computation.)Ĭanada’s Income Tax Act may, however, adjust a taxpayer’s tax cost or proceeds of disposition. The taxpayer may deduct one-half of the loss-i.e., $12,500-from any other realized capital gain. The taxpayer will then realize a capital loss of 75,000 – 100,000 = $25,000. Say instead that the taxpayer sold the property for $75,000. The taxpayer must report one-half of the gain-i.e., $25,000-as income. The taxpayer therefore realizes a capital gain of 150,000 – 100,000 = $50,000. In this case, the taxpayer’s adjusted cost base is $100,000 and the proceeds are $150,000. For example, a taxpayer buys a rental property for $100,000 and sells it a few years later for $150,000. The ACB, when deducted from the proceeds of disposition, determines the amount of a capital gain or loss when a taxpayer disposes of a capital property. The second figure is the taxpayer’s proceeds for disposing of the capital property. The first is the adjusted cost base (ACB), which is the taxpayer’s tax cost for acquiring a capital property.
Two amounts are used to compute the balance of a capital gain or loss. Another example: an allowable-business-investment loss (ABIL) is a specific defined type of capital loss that may be deducted from any source of income.) For instance, if a deceased taxpayer has allowable capital losses remaining even after applying all available carryovers, the excess losses may offset any source of income on the deceased’s income-tax return for the year of death or for the year before the year of death. That is, allowable capital losses generally cannot be used to offset, say, business income or employment income. So, only half of a capital loss is an allowable deduction, and the deduction may only be used to offset taxable capital gains. If, on the other hand, the taxpayer sells the property at a loss, the taxpayer may deduct one-half of the loss from the taxable portion of any capital gain. In other words, only half of a capital gain is taxable. Generally, when a taxpayer disposes of a capital property-e.g., real property, corporate shares, a partnership interest, mutual funds, etc.-and realizes a capital gain, the taxpayer must include one-half of the gain in his or her income. Introduction – Taxation of Capital Gains in Canada
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