Gifting investments to others can have substantial tax implications. In this section, we will discuss the considerations and consequences of gifting investments, including a case scenario and important key terms.
Gifting Investments: An Overview
When a taxpayer decides to transfer investments to adult children or parents as a gift, this act triggers a deemed disposition. That is, the Canada Revenue Agency (CRA) considers the gifted investments as if they were sold at their fair market value (FMV).
Key Considerations
Before making or recommending a gift involving investments, it’s vital to understand the effect it will have on the tax situation of the person giving the gift, specifically regarding any resulting capital gains or losses in the year the gift is made.
- Capital Gains: If the FMV of the investment at the time of the gift is higher than its original purchase price, the difference is treated as a capital gain, which is taxable.
- Capital Losses: Conversely, if the FMV is lower than the purchase price, a capital loss is realized, which may offset capital gains of the same or subsequent years.
Mermaid diagram illustrating gifting process:
graph TD
A[Taxpayer Gifts Investments] --> B((Deemed Disposition))
B --> C{FMV > Purchase Price}
B --> D{FMV < Purchase Price}
C --> E[Capital Gains]
D --> F[Capital Losses]
Case Scenario: Eisha’s RRSP Questions
Eisha is considering gifting investments to her parents and has some questions regarding her Registered Retirement Savings Plan (RRSP).
- How will gifting investments affect her RRSP contributions?
- What are the tax implications if she gifts investments that are in her RRSP?
Key Terms & Definitions
Here are some of the key terms related to gifting investments, which you should be familiar with:
- Deemed Disposition: The sale or transfer of property considered to have been done at FMV, for tax purposes
- Fair Market Value (FMV): The price that an asset would sell for on the open market
- Capital Gains: The profit realized from the sale of an investment, taxable by CRA
- Capital Losses: The loss incurred from the sale of an investment, which can be used to offset capital gains
Key Takeaways
- Gifting of investments to adult children or parents results in a deemed disposition at FMV.
- The taxpayer should closely analyze the potential capital gains or losses before gifting investments.
- The implications on RRSP need careful consideration, especially how gifting could potentially affect contribution limits and benefits.
Frequently Asked Questions (FAQs)
Q: What constitutes a deemed disposition?
A: A deemed disposition occurs when the CRA treats an asset as if it has been sold at its fair market value, for the purpose of determining tax obligations.
Q: How does gifting investments impact my taxes?
A: Gifting an investment can result in capital gains or losses depending on the difference between the fair market value and the original purchase price. Capital gains are taxable, while capital losses can be used to offset other gains.
Q: Can I claim RRSP contributions if I gift investments within my RRSP?
A: Gifting investments within an RRSP generally has different tax rules compared to non-RRSP investments. It’s advisable to consult a tax professional for specific advice.
Complete the online learning activities to assess your understanding of these concepts.
Canadian Securities Course | Volume 2
📚✨ Quiz Time! ✨📚
## When a taxpayer gifts an investment to an adult child, what is the tax implication for the person making the gift?
- [ ] They can defer taxes until the investment is sold by the recipient.
- [ ] There are no tax implications for the person making the gift.
- [ ] The gift is only taxable if it is above a certain threshold.
- [x] It results in a deemed disposition at fair market value.
> **Explanation:** When a taxpayer gifts an investment to an adult child, it is considered a deemed disposition at fair market value, meaning the taxpayer may have to pay capital gains tax in the year the gift is made.
## What should be primarily considered before making a gift of investments?
- [ ] The emotional benefits of giving.
- [ ] The effect on the donor’s retirement plan.
- [x] The effect of any resulting capital gains or losses.
- [ ] The future performance of the gifted investment.
> **Explanation:** Before making a gift of investments, it is important to consider any capital gains or losses that will result in the year the gift is made, as these will impact the taxpayer's tax liability.
## When investments are gifted to parents, what tax event occurs?
- [ ] The parents will be responsible for the capital gains tax.
- [ ] The donor can write off the investment's value.
- [x] A deemed disposition at fair market value by the person who made the gift.
- [ ] There are no tax events when the recipient is a parent.
> **Explanation:** Just like gifting to adult children, gifting investments to parents results in a deemed disposition at fair market value by the person who made the gift.
## What is a 'deemed disposition'?
- [x] A notional sale of a property or investment at its fair market value.
- [ ] A sale of property below its fair market value.
- [ ] An inheritance without tax implications.
- [ ] Transfer of ownership without change in tax liability.
> **Explanation:** A deemed disposition is a notional sale of an asset at its current fair market value, often leading to capital gains tax implications for the donor.
## How should resulting capital gains from a gift be reported?
- [ ] They do not need to be reported at all.
- [ ] They can be deferred until the recipient sells the investment.
- [x] They should be reported in the tax year the gift is made.
- [ ] They should be reported by the recipient.
> **Explanation:** The donor is required to report any resulting capital gains in the year the gift is made, as it is treated as a disposition of the investment.
## If an investment gift results in a capital loss, what can the donor do?
- [ ] Deduct the loss from the recipient's taxes.
- [x] Use the capital loss to offset other capital gains.
- [ ] Carry forward the loss indefinitely.
- [ ] Defer recognizing the loss.
> **Explanation:** A donor can use a capital loss resulting from the gift to offset any other capital gains on their tax return.
## Which of the following is NOT a potential result of gifting investments?
- [ ] A deemed disposition at fair market value.
- [ ] Capital gains tax on the part of the donor.
- [x] Immediate tax benefits for the recipient.
- [ ] Capital losses can be used to offset other capital gains for the donor.
> **Explanation:** Gifting investments does not provide immediate tax benefits to the recipient since the tax implications affect the donor who has to report the deemed disposition.
## What is the main tax consideration when making a gift of investments?
- [ ] Ensuring that the recipient will benefit from the gift.
- [x] The capital gains or losses in the year the gift is made.
- [ ] The market value of the investment.
- [ ] The original purchase price of the investment.
> **Explanation:** The main tax consideration is the capital gains or losses that the donor will need to report in the year the gift is made.
## Why might someone gift an investment to a family member?
- [ ] To avoid paying any taxes on the investment.
- [x] For estate planning and wealth distribution.
- [ ] To earn higher returns.
- [ ] To benefit from immediate capital losses.
> **Explanation:** Gifting investments to family members is often done for estate planning and wealth distribution, though it comes with tax implications that must be considered.
## In the context of gifting investments, what does ‘fair market value’ refer to?
- [ ] The value of the investment when it was originally purchased.
- [ ] The price the donor decides.
- [ ] The book value of the investment.
- [x] The price the investment could be sold for in an open market.
> **Explanation:** Fair market value refers to the price at which the investment could be sold in an open market, and this value is used to determine the capital gains or losses when a gift is made.