How Gift Tax Works for Gifts to Family Members

Gifting family members is common. We give gifts on festivals, occasions, and holidays, and we also use gifting to support our loved ones. A grandparent gifting wealth to their grandchildren, parents gifting a large sum of money to their children for tuition fees or house downpayment, or gifting spouse or children real estate or shares in the family business is common in a family. But do you know the gift you are giving could bring gift tax implications in certain cases?

The Canada Revenue Agency (CRA) has several tests to determine whether a transaction is a gift. It also has rules around which transactions are taxable and how. Let’s begin with classifying the transaction as a gift.

What Is a Gift from CRA’s Perspective?

In Canada, income in any form is taxable. A gift is money, real estate, stocks, bonds, and other assets you give without getting anything in return. If you get any services or products in return, then that asset is considered income and is taxable.

The tax implication of a gift depends on three things:

• What are you gifting?

Gifting any amount of Cash is tax-free. Even primary residence can be gifted tax-free, but the land transfer tax applies. However, other assets like vacation homes, stocks, and investments attract capital gains tax.

• Whom are you gifting?

Gifts to arms-length relations, such as common-law partners (spouse transfers), children, and other direct relations, are non-taxable. However, an employer gifting an employee cash or non-cash items is taxable if the gift value exceeds $500.

• How are you gifting?

If you are gifting directly or via a trust, the tax depends on what you are gifting. But if you are gifting money through a Will, probate fees will apply. It is better to gift cash directly while alive to avoid probate fees.

How Is a Gift to Family Members Taxed?

Taxation on gifts given directly to arms-length relations depends on the nature of the gift.

Cash Gift

A cash gift is not considered income; hence, it has no tax implications. Any amount of cash gifted to family members is not taxed. However, transactions where large amounts of money are given as a gift are monitored and could come under scrutiny.

(a) Down payment of a home: The most common large sum gift is gifting money for a down payment for a home. You can give your family member a one-third, half, or even full downpayment as a gift. For this transaction, the lender will require you to provide proof of the relationship with the recipient, as the lender wants assurance that the money won’t be expected to be paid back.

(b) Gifting cash to a minor: When gifting cash to a minor, there could be a tax implication on you if the money is invested and dividends or interest income is earned. For instance, Jacob gifted his daughter Sarah $200 every year on her birthday, which he invested in a dividend stock under Sarah’s name. Although the dividend is earned by Sarah, the dividend tax will be attributed back to the giver, Jacob, as the dividend is a taxable income.

However, if Jacob sells the stock, capital gains/losses realized from the gifted funds are taxed in the hands of Sarah. Since Sarah has no income source, Jacob gets a tax advantage of a lower tax bracket.

The CRA designed these attribution rules to prevent individuals from using their child’s low tax bracket to split income and avoid taxes. 

Tip: Instead of giving cash and buying stocks for a minor, parents can gift money to their children through a Registered Education Savings Plan (RESP) and buy stocks through it. The RESP can allow your investment to grow tax-free. At the time of withdrawal, only the investment income will be taxed in the hands of the child. So, if your $40,000 RESP contribution is now $60,000, and your child withdraws the entire amount, $20,000 investment income will be taxable. 

Gifting Real Estate, Stocks, or Other Investments

Gifting cash is not taxable, but gifting real estate, stocks, or other investments attracts capital gains tax. Assets like shares or real estate have a fair market value (FMV), which may be lower or higher than the price at which you purchased.

When you gift real estate or stocks, the CRA considers it a deemed disposition of the property at its FMV at the time of the gift. You have to report 50% of the difference in cost and FMV in your tax return in the taxable year you gifted the asset. This percentage will change from January 1, 2026, as individuals will have to include 66.6% of any capital gain above $250,000 in their taxable income.

Keeping accurate records of the fair market value at the time of transfer is essential to ensure correct reporting when the stocks are sold.

Gifting to Spouses: The CRA has a provision for spousal rollover when you transfer assets to your spouse or common-law partner. Suppose Jacob gifted his stocks, which he bought for $10,000, to his wife Mary when the FMV of the asset was $100,000. He can elect for spousal rollover under which no tax will be triggered at the time of gifting. The tax will be deferred until Mary sells the shares.

However, the capital gain tax, when triggered on the sale of shares, may be attributed back to Jacob, the original owner. If Jacob wants to avoid future attribution, he will have to opt out of the spousal rollover provision. However, electing out will trigger immediate capital gains as the CRA will consider it as the sale of shares to the wife at FMV.

Gifting Principal Residence: If the real estate you are gifting is your principal residence, you may be eligible for the principal residence exemption. This could eliminate the capital gains tax on the transfer, but the land transfer tax will apply. Such tax exemptions are complicated and require proper documentation and reporting to prove your eligibility.

Before you seek an exemption, consult a tax expert to ensure the CRA does not knock on your door for wrongly applying the exemption.

Taxes are complex. A tax-free gift, when gifted in a certain manner, may become taxable. Hence, it is important to understand the tax implications of family gifting to avoid unintended tax burdens or complications.

Contact DNTW Toronto LLP to Help You with Taxation on Gifts

A skilled tax consultant helps you understand your tax implications and plan your gifts and other transactions in a tax-efficient manner. At DNTW Toronto LLP, our accountants and tax consultants can provide services such as tax planning and tax filing. To learn more about how DNTW Toronto LLP can provide you with the best taxation expertise, reach out to us here.