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That said though, how much are you actually able to give your friends and family before there are tax implications? While this may not be an issue for the odd $50 or even $100, when you start to get into the thousands, that's when you may start to question it.
While you may not think that gifting money in the thousands is common, it actually is between family members. There are plenty of reasons for this but the main 2 are down payments and college tuition expenses. Let's take a look at how gifting money, in any amount, works in canada.
What is Considered Gifting Money?
Before we get too far into discussing gifting money in Canada, we should start by identifying what's considered to be gifting. Essentially, this means that money is given without anything given in return. If services or products are exchanged, the funds are then considered income and no longer non-taxable. This counts for any amount of money. Even if you're gifted $30,000, if there is no contractual obligation in return, then the money is considered to be a gift. This is important to know because it can make a difference in your financial planning.
Gifted Amounts that are Tax-Free
When it comes to gifting money, there are no taxes on any amount in Canada, unlike in the US, where you do not have to pay gift tax. Keep in mind, though, that if you're providing a gift for a certain purpose, you may be required to provide proof of the relationship. This is most common when gifting money for a down payment for a home. Lenders like to be sure the money is legitimate and from a relationship. The further apart the relationship, the more difficult it may be to gift the money.
Gifted Money and the CRA
When it comes to gifting money, it doesn't need to be reported to the Canada Revenue Agency, and no gift tax return is required, unlike in the US. The only time you would report gifted money is if you're donating to a charity. usually, when you gift money to a charity, you're provided with a tax receipt, which you can then claim on your tax return. There are some restrictions to this, though.
In order for your donation to be eligible for a tax deduction, the money must be given to a qualifying organization. You can check a list that's available from the CRA. Certain organizations, such as:
- United Nations
- The Government of Canada
- Any province or territory
They aren't included on the list because they automatically qualify.
The other restriction to consider is your qualifying amount. This is the amount you are eligible to claim up to. Anything above that can't be claimed. This number is usually somewhere up to 75% of your net income. The only way this amount could change is if you gift capital property, then capital gains are involved.
How to Deposit Large Gifted Amounts
Depositing large amounts of money is actually pretty easy. Whether you're depositing a cash gift, a cheque or getting an e-transfer, you can generally put as much money in your account as you want. That said, though, anything over $10.000 deposited in one day does have to be reported. Just because the money is reported, though, doesn't mean that you can't deposit that money.
The most common way of depositing the funds into your account, especially in amounts over $10,000, is by going into the bank and speaking to a teller. They will let you know if there are any processing fees for the deposit and if you have an account that will allow for the balance. While most accounts don't have limits, something like a tax-free savings account might.
Generally speaking, though, you should just be able to go into the bank, deposit the outright gift of money and have immediate access to it. Some financial institutions may require proof of where the money came from, others may just ask. Either way, you should be able to tell them. If you're depositing a cheque, it's likely you won't get questioned at all.
Parents and Children: Gifting Money in Canada
When it comes to gifting money from a parent to an adult child, the process is the same as if you were gifting money to any other person. That said, another option is to just deposit money into their account if you have access (joint account) or a bank with the same financial institution. It's just as simple as giving cash but without the hassles. Also, this way, nothing has to be done on their end.
If you're paying tuition, instead of giving them the money, you can also just pay the school directly. For many students, they still fall under their parents income and are unable to obtain financial aid, so it's very common for parents to help with tuition costs.
Gifting Money to Friends
Gifting money to friends is a very simple process. That said though, it depends on the reason that you;re gifting the money and how much you're gifting. If it's just a couple hundred dollars then a simple e-transfer is usually the easiest, besides cash.
If you're gifting your friend a large amount of money for something like a down payment on a home, this is where it might get a little tricky. This is because it may not make sense to a lender why you are gifting them that much money. They usually like the money to come from an immediate family member like a parent, grandparent, or even a sibling. They often do allow cousins and more distant relatives to gift the money as well. Most lenders won't accept a down payment from a friend for a down payment and if they do, a gift letter to prove the relationship is required. This is because you can't lend money for a down payment; it has to be gifted.
How to Prove that the Money Was Gifted
When you receive money as a gift, most of the time you won't be questioned unless you are using the money for a down payment on a home. That said though, if you were, it's easy enough to prove with a gift letter. If the money is intended to be used for a down payment then it wouldn't be surprising for the lender to check and see if the person gifting the money if they have the financial ability to gift that much money.
The thing with gifting money is that, especially for a down payment, it shouldn't be expected to be paid back. Also, the full amount of the down payment can be gifted as well. The only stipulation is that if you are self-employed, at least 5% of the down payment is required to be paid by you. No matter how much is required, though, a down payment gift letter is always required to secure the mortgage. This provides validity to the lender that the money will be paid since it won't show up on any of your bank statements. If you don't have a gifted down payment, you need to show a few months of bank statements in order to prove that the money is in your account.
Are There Any Restrictions on How Much Money I Can Receive?
Just like there are no restrictions on how much money you give, there isn't a restriction on how much you can receive. This is because the money isn't considered to be income. Therefore, there are no tax implications for you. It's important to note, though, that large amounts of money are monitored so they can be reported.
The only time you will find yourself paying tax on money you receive is if you're paid and there is a contractual obligation on your end. The most common reasons that people deposit large amounts of money are:
- Selling high-ticket items like vehicles
- Gifts from a family member
- Settlements
- Pension payouts
- Medical expenses
The large amounts that are from an employer are considered income and will be taxed.
Gifting Money Through a Will
When creating an estate plan, many family members will often gift money through a will. How exactly does this work and what are the tax implications? Well, the rules about giving money to family members through a will or not are the same. Since there is no gift tax in Canada, taxes do not need to be paid. If there is property involved though, then that's a different story.
If a property is gifted through a will, then you will have to pay tax upon receiving the gift. These are capital gains taxes and are based on the fair market value of the property. For this reason, some people choose to have the property transferred before their death in order to get the tax benefits. Any property not sold before death also has to be claimed on the deceased person's final tax return and is considered to have disposed of all their property. This is known as deemed disposition.
With a will, it's common to get gifted a combination of money and property from a deceased individual. A lot of times, these can come from a trust fund. There are two kinds of trusts: irrevocable trusts and revocable trusts. The difference between the two is an irrevocable trust can't be altered, while a revocable trust can.
When it comes to receiving money or property, there are probate fees that have to be paid, but there is no estate tax. Estate taxes don't exist in Canada, but the executor of the estate will have to file taxes for one final year on behalf of the deceased person. You can also find a lot of this information in the Income Tax Act.
Gifting Assets in Canada
If, instead of gifting money, you choose to gift assets, then there will likely be tax consequences depending on the person's relation to you. For instance, when you gift capital property, it’s considered to be sold at fair market value. This means you would still need to pay capital gains amounts on your income taxes. However, there are some stipulations to this since you don’t pay capital gains on your family home, also referred to as a principal residence.
When it comes to gifted property, there are a lot of different aspects to consider. You need to consider that when you gift to a family, attribution rules apply, and they will get any future gains from the property gifted. You also need to consider if the person you’re gifting the property to is considered to be non-arms length in relation. Gifts to common-law partners (spouse transfers), children, and other direct relations are considered to be at arm’s length.
Things to Consider
When you gift property in Canada, it’s not just capital gains you need to consider but capital losses as well, especially if this is another property that isn’t used as a principal residence. As we’ve already mentioned, even if you gift the property, it will be considered to be sold for fair market value, which doesn’t always mean that you’ve accrued gains.
If you haven’t deemed proceeds based on the FMV of the property, then you could claim cost capital allowance. This would allow you to claim any expenses incurred on the property as well as the depreciation. However, with such gifts, any received proceeds from the property sale by the owner would not be split between you and the person you gifted to. Legally, these would be theirs alone, and they would pay any taxes associated with the sale.
In the gifting process, expenses will also likely be incurred. This is because there will be transfer fees and other fees associated with the transfer.
Gifts From Employers
In Canada, when you receive a gift from your employer, whether this is a non-cash gift or not, it’s likely that this gift is taxable. There are some exceptions when the employee is considered to be at arms’s length, but in most cases, these amounts are considered to be a taxable benefit. That said, there are corporation rules in play to avoid double taxation.
Conclusion
Gifting and receiving money is common practice in Canada. Many people prefer it over other gifts. It's also one of the main reasons that so many people use Interac e-transfer. While most large gifted amounts come from immediate family members, they can come from friends as well.
The only time that gifting gets tricky is when it comes to down payments for a home. Other than that, there really are no restrictions when it comes to gifting, making gifts of cash easy to give. Depending on how you receive the money though, it's always beneficial to ask for tax advice to ensure you are making the right decisions.
