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Gift tax on land, is there any?

13259 Views 10 Replies 3 Participants Last post by  OhGreatGuru
Hi folks,

I also posted this in the tax form but seeing it involves real estate thought somebody here would be able to answer this for me. My fiancee's parents are giving us a piece of land which we plan to build a house on and we are wondering if we will have to pay any gift tax and also what other fee's are involved with this? Thanks folks.
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Hi Grant - there is no "gift tax" in Canada.

The Canadian tax code includes a set of rules which are designed to prevent people from transferring assets between spouses or to minor children in order to avoid paying tax. These are called the attribution rules - because they cause income from a property held by one person to be attributed back to another.

However, because you are not a minor, and because the gift is not being made from one spouse to another, and because there is no general "gift tax" in Canada, there is no tax consequence for you or your fiancee associated with your fiancee's parents giving you land.

HOWEVER, your fiancee's parents will be deemed to have disposed of the property at fair market value, and they may be subject to a capital gains tax on the land as a result of their disposition (by way of a gift to you). Here is the Revenue Canada interpretive bulletin on gifts of property.

Also - without making this response overly long - if your fiancee's parents decide instead to "sell" you and her the property for a very modest sum (sometimes people do this) - there are negative tax implications for you. Outright gifts are much better than sales for less than the fair market value.

Finally - when you build the house on the land, the house and land will together form your matrimonial home (either on the date of your marriage, or on the date when your relationship becomes a common-law relationship, or on the birth of a child), and your financee will lose any separate claim she has to that gift of land in the event of a marriage breakdown. I'm not suggesting anything here, believe me! However, I do think it is useful to know what the consequences of these kinds of decisions are. :cool:
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YOU do not have to pay any tax upon the receipt of the gift - Canada has no "gift tax".

Your fiancee's parents will be deemed (from a tax point of view) to have disposed of the land at its fair market value when they gift it to you. They will need to indicate, on their taxes for that year, the disposition of a capital asset (the land) and pay tax on any gain in the value of that land from when they first acquired it (less any costs to adjust the cost base of the land).

So, if they acquired the land for $50,000, and it is worth $100,000 when they give it to you, they (or he or she, depending on who owns it) will need to report a $50,000 deemed capital gain on their tax return.

If they aren't clear about this, then they should seek professional advice.

As for costs to change the title on the land - it will depend on your location, and I'm not the best person to answer this. The short answer is they will be minimal.
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Not a problem my friend!

Capital gains taxes were first introduced in Canada in 1972 (to replace inheritance taxes, in part). And then, briefly, there was a capital gains exemption of up to $100,000 per individual per lifetime.

Your fiancee's parents may have elected to deem a disposition of the land in question in 1985 to take advantage of the one-time exemption. In that case, they would have recorded the gains from 1972 (when the capital gains tax was introducted) to 1985. The tax payable now would be on the gain from 1985 to whenever it changes hands again.

If they did not make an election to have a deemed disposition in 1985, then tax will be payable for the last 24 years (you cannot go back and change a return that old).

Do your fiancee's parents have questions about this? You may want to send them to a tax preparer or fee-for-service financial planner to ensure everyone knows the financial consequences of this very generous gift. Good luck!
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In that case, they would pay the tax on any gain in value from when they received it, to when they give it to you. It is possible there is no gain in value over such a short time frame. :)
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