Tax impact of transferring a home to family members

Pay attention to the principal residence rules

The tax rules and regulations concerning giving large gifts to family members aren’t quite as cut-and-dried as they might appear on the surface. Last time, I looked at some of the situations when the Canada Revenue Agency (CRA) might want a gift too. This time, let’s look at some of the complications involved in transferring a principal residence.

You can transfer your home by gift, and if the home was properly designated as your principal residence for each year you owned it, the transfer will be exempt from tax. (If your home was only a principal residence for some years and not others, the portion of the exempt gain is accordingly pro-rated.)

To qualify as a principal residence, you (or your spouse or child) have to have ordinarily inhabited it. There is only one principal residence exemption per family. However, a transfer of a second home (i.e., a non-principal residence) can be made to your adult and/or married child and qualify as a principal residence for the child.

Although you will be liable for any accrued gain up to the time of the transfer of this second home to your adult child, assuming the home remained as your adult child’s principal residence on a go-forward basis, any further gain would be exempt because the adult child can claim the home his or her own principal residence.

One perk about gifting your principal residence to a family member is that in Ontario, land transfer tax will not be triggered because this tax is based on the consideration paid by the person receiving the property. When documenting the transfer with the registry office, you should note that the consideration is “nil,” as it is a “gift for natural love and affection.” This way, your family member receiving the gift won’t have to cough up cash to the Ontario government on that transfer.

And for those of us living in Toronto, this is a double gift because you will also avoid the additional municipal land-transfer tax (and which, added to the provincial tax, results in double the land-transfer tax for us unlucky ones within the GTA). Note: 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. Rules in other provinces and municipalities vary widely, so check local land transfer rules or consult with your lawyer before making the gift.

Joint liability

Beware, however, of Section 160 of the Income Tax Act, which is designed to prevent you from avoiding tax by transferring property to your family members. You will be jointly and severally liable with your family for any pre-existing tax that you were liable to pay, not only 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.

Is there a gift tax?

The gift-tax rules were repealed back in 1971 as part of the major tax reforms of that year. The rationale behind that change was that since any accrued gains on capital assets would be taxable at death, the combination of this tax with the gift tax would result in a huge tax hit upon death.

However, the United States has not been so kind, and continues to tax gifts by any individual (the tax is on the giftor). However, so long as you are not gifting property that is located in the U.S., don’t worry about gifts to family members south of the border.

The U.S. gift tax will generally not apply to gifts of intangible property by a non-U.S. citizen or gifts of tangible personal property and real property by a non-U.S, citizen if the property is not located in the U.S. If, however, you are a U.S. citizen, even if you are resident in Canada for tax purposes, the U.S. gift tax rules will still apply to you, so make sure that you consider the U.S. rules before making any substantial gift. Note: There are certain annual exemptions in the U.S. for gift tax, as well as a lifetime exemption. Consult your U.S. tax advisor before making the gift.

Samantha Prasad, LL.B., is a Partner with Toronto law firm Minden Gross LLP, a Meritas Law Firm Worldwide affiliate, and specializes in corporate, estate, and international tax planning. She writes frequently on tax issues, and is the co-author of Tax and Family Business Succession Planning, 3^rd Edition. She is also co-editor of various Wolters Kluwer Ltd. tax publications. Portions of this article first appeared in The TaxLetter, © 2019 by MPL Communications Ltd. Used with permission.

Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.