Growing up, Father's Day, falling just a month after Mother's Day, always
provoked me to ask my parents, "So, when's our Day?"
"Why, every day is Children's Day!" they responded. Later, after comparing
notes with my friends, I learned that was the standard response to this age-old
question.
As dads and granddads open their Father's Day presents tomorrow, they can
take comfort in the fact that the Canada Revenue Agency will not come knocking
on their doors to collect tax. Gifts in Canada can be given and received
tax-free. This contrasts with the United States, which imposes a gift tax when
such gifts are made in excess of certain annual or lifetime exemptions.
That being said, in Canada, if you gift property that has gone up in value,
such as real estate or investments, you are deemed to have received proceeds of
disposition equal to the property's fair market value. As a result, you could
face capital gains tax on any accrued gain from the date you purchased the
property to the date of the gift.
Then you are off the hook. Any future appreciation or income from the
investments would be taxed in the hands of the recipient. There are certain
exceptions -- the most significant is when gifts are made to a spouse or
common-law partner or to kids under the age of 18.
If you gift property to a spouse or partner, any future income and gains
earned on that property "attribute" back to you. That means you will be taxed on
the income at your marginal tax rate applicable to the type of income (i.e.
interest, dividends or capital gains).
When it comes to gifts to minor children, however, only income -- not capital
gains -- attribute back to the gifter.
This opportunity has led to the proliferation of "in-trust" or informal trust
accounts. In such cases, a parent opens up an account at a financial
institution, and no formal trust deed is drawn up. The money in these accounts
is typically invested in equity mutual funds, which generate little if any
income, but produce capital gains. Those gains are not attributed back to the
gifter.
At least week's Society of Trust and Estate Practitioners of Canada's
national conference, the CRA was asked several questions about the taxation of
intrust accounts.
While the official response won't be released until fall, the CRA reaffirmed
its previous position that the taxation of an informal trust will be governed by
its "legal nature."
The CRA decides whether a trust account has actually been created for the
child, absent a trust document, or whether an outright gift has been made. Is
the parent acting as agent for the child or do the funds still remain the
property of the transferer/parent?
The answer, of course, will depend on the specifics of each case. If a parent
occasionally dips into the in-trust account to meet the monthly mortgage
payment, it may be harder to argue that the money belongs to the child.
My best advice? For starters, don't touch the kids' money. And, if the
dollars are big enough, you should consider using a lawyer to draw up a formal
trust deed.
Jamie Golombek, CA, CPA, CFP, CLU, TEP is the vice-president, taxation and
estate planning, at AIM Trimark Investments in Toronto.
Jamie.Golombek@aimtrimark.com