If a receipt constitutes income, it's taxable. However, according to Canadian law, there isn't an unambiguous definition of 'income.' Tax must be paid on taxable income (the taxpayer's yearly income). Yet, this isn't clear because the Income Tax Act has income defined as taxable income instead of offering an exact definition.
The courts have determined that the following are true about income:
- Income is not the same as capital
- Income is typically regular and recurring
- The amount the taxpayer gets must belong to that taxpayer
- The receipt must be income for the taxpayer
- The gain must be convertible into cash
- Nominal gains are the only ones recognized
There are also case law exclusions, including gifts, inheritances, gambling winnings, personal injury damages, and windfalls.
What Qualifies as a Gift in Canada?
The definition of a gift is a voluntary personal property transfer. It must be given freely with no obligations attached. So, if you transfer property to someone, it's only a gift if the transfer is made without expecting a reward, it's voluntary, and there are no strings attached.
Does Canada Have a Gift Tax?
No. Gifts and inheritances aren't taxed because they're transfers of old wealth and don't recur. Income, on the other hand, is about creating new wealth. Bear in mind some jurisdictions might tax gifts, such as in the US, where the tax applies to the gift's donor.
Effects of Business Gifts
A gift flowing from a productive income source, such as a business, means it might be treated as income from that business. Gifts from an employer count as a taxable benefit and must therefore be reported as so. If the combined value of non-cash gifts is less than $500, it doesn't have to be reported that year.
Effects of Capital Property Gifts
Capital property, like real estate, bonds, shares, trademarks, or patents, are slightly different. The recipient doesn't have to pay tax, but the giver might have to pay capital gains tax. If the property is voluntarily transferred, the giver is seen to have disposed of it for the fair market value. This means the giver must report any capital loss or capital gain on his income tax returns that year. The recipient doesn't have to report anything.
Disposition Rules Exemptions
The disposition rule won't apply if the recipient is the giver's spouse or common-law spouse. Another exemption is a taxpayer can transfer assets to a corporation with tax deferral. In order to do this, it's best to seek the assistance our assistance because it can get complicated.
Qualifying for Gift Tax Credits
Suppose a taxpayer gives a gift to a qualified recipient like a registered municipality or registered charity. In that case, they can claim tax credits to reduce their tax liability for the same tax credit amount. The tax credit will be the fair market value of the gift.
The Importance of Documentation
It's essential to document a gift in writing because the Canada Revenue Agency might try to collect taxes on gifted money if they think it is unreported income that should be taxed. The taxpayer will be able to show the documentation (a deed of gift) to the CRA to prove it is a legitimate, tax-exempt gift.
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