As a tax expert, you often hear stories of people who have avoided paying taxes on a rental property or second home by selling it to their children for a dollar. Although points are given for creativity, the tax has already thought about it!
Things to consider for tax purposes
The Income Tax Act provides that property disposed of in favor of a related person is deemed to be disposed of at fair market value. You will therefore have to declare that you have sold the property at market value and pay taxes as if you had sold the property to a foreigner at market price, despite the sale price of $1.
And it gets worse: your children will also be deemed to have bought the property for $1. They will therefore pay taxes on the full amount of the sale, being able to deduct only the dollar paid for that purchase. The Law therefore triggers double taxation in these cases: a first taxation on the sale to the children and a second taxation on the same gain on the subsequent sale of the children.
Your options
You therefore have only two logical options to avoid the application of these rules: sale at market value or even donation. In either case, you will have to pay tax on the disposition for your children, but in both cases your children will be deemed to have paid the fair market value for that property.
Estate planning and living donations are very often interrelated because what you give while you are living, you do not have to bequeath it. Contact one of our tax experts to help you develop the best strategies for transmitting your wealth. The tax impacts vary depending on the people who receive the goods (children, spouse, unrelated people like a friend, etc.). By choosing to pass the right assets on to the right people, you will ensure that you leave more to your loved ones than to tax!