Transferring properties to family members is a common practice with various motivations, including income splitting, probate savings, creditor proofing, and estate planning. However, beyond legal considerations, these transactions also carry significant personal income tax implications. This blog aims to shed light on the implications for the transferor when transferring property or loaning funds, at no or low interest rates, to another family member to earn investment income.
Tax Implications upon transfer:
When gifting or transferring property to a spouse, the transfer typically occurs at cost, leading to no immediate tax liability for the transferor. However, it’s crucial to note that transferring property with a loss position to the spouse doesn’t allow the transferor to claim that loss due to the superficial loss rules. Instead, the loss becomes available to the transferor after the property is eventually sold by the spouse to a third party. Proper documentation of gifts between spouses is critical to avoid complications.
On the other hand, when gifting or transferring property to family members other than the spouse, it leads to immediate tax implications. In such instances, the transferor is deemed to have disposed of the property at its current fair market value. Consequently, the transferor may need to report a capital gain or loss on their tax return. Generally, receipt of gifts has no implication to the transferee (person receiving the gift).
Attribution of investment income and gains:
Understanding income attribution rules is vital when transferring or gifting property to family members. These rules stipulate that under specific circumstances, any investment income/losses or capital gains/losses generated by a family member from the transferred property must be included in the transferor’s income (and not the family members’). The application of attribution rules depends on the transfer method, relationship with the recipient, and the nature of income.
The summary of personal income attribution rule is provided below:
| Transfer Method | Transfer to: Spouse | Transfer to: Minor Child | Transfer to: Adult Relative |
| Property is gifted | Attribution of both income/loss and gains/loss | Attribution of income/lossNo attribution of capital gains/losses | No attribution |
| Property is loaned at no (or low) interest rate | Attribution of both income/loss and gains/loss | Attribution of income/lossNo attribution of capital gains/losses | Attribution of income/loss;No attribution of capital gains/losses |
Minor child includes a non-arm’s length under the age of 18, including a child, grandchild, or a niece or nephew of the transferor. Adul relative include an individual connected to transferor by blood, marriage, common-law partnership or adoption.
The attribution rules don’t apply if:
· Income earned or loss is of business nature.
· Income or gain realized after the death of either the transferor or transferee.
· The transferor is a non-resident of Canada.
· The transferee ceases to be a spouse of the transferor, such as through divorce or separation.
· The transferor receives fair market value for the property or through interest-bearing loans.
Key takeaways:
Transferring property to a spouse typically incurs no immediate tax liability for the transferor.
Transferring property to family members other than the spouse may result in immediate tax implications for the transferor.
Income attribution rules dictate that investment income, gains or losses may be attributed to the transferor under specific circumstances.
These insights underscore the importance of careful planning and consideration of tax implications when transferring property to family members. For further guidance on navigating income splitting strategies and understanding the associated tax implications, don’t hesitate to reach out to our tax firm.