Deed of Gift – A Gift at a Discount – or Partial Payment

deed of gift
Date: 09 Mar, 2023| Author: Fred Streiman

Elsewhere we have discussed Deeds of Gift. I direct our loyal readers to the blog titled “Start with no one gets anything for nothing…”.

One of the main purposes of a deed of gift is rock solid proof that indeed a gift was intended, and also to take advantage of various provisions of the Family Law Act.  Specifically, to the degree possible by the donor to protect the recipient from any claims by an ex-spouse. This is not perfect, but it is the best that the donor can do.

To give a simple example, if a parent wishes to gift $100,000 to a child, one of the best ways of protecting that money from a claim by an ex spouse is for it to be held solely in the name of the child, not used to buy or improve a matrimonial home and the child has evidence that indeed a gift was intended.

However, there are tax ramifications to deeds of gift and one must be very careful to appreciate them. Advice by a competent accountant would be very helpful in this situation.

An example of a scary pitfall is when a parent wants to gift a property at a discount to a child. As an example, selling/gifting a $1,000,000 rental property for $400,000. If the agreement called for that type of payment, a sinister tax circumstance would arise. Namely, the government would take double its pound of flesh. The government would ignore the actual price paid and simply deem that the rental property had been sold for its true market value namely $1,000,000.  If not a principal residence, this would be a taxable disposition.

The child in turn would not be able to use an adjusted cost base of $1,000,000, but rather only the $400,000 that was paid. A parent simply applying a nominal price of one dollar would be even more horrendous.

On the other hand, if the transfer is a clean and simple gift, there is a deemed disposition at fair market value. The recipient will have a cost base of fair market value resulting in no double taxation. One option is simply gifting a certain amount of money to the child and let the child use the funds received to buy the property from the parent at its real market value.

Simply put, no discounts in a Deed of Gift.  There are work arounds, but they must be discussed with your accountant and Estate lawyer.

These are all important estate planning concerns and must be kept in mind when thinking about gifting real estate or indeed any capital property to family members.