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Less Than Fair Market Value – Double Taxation

When gifting real estate to family members, if you transfer a property to a related person for consideration less than the fair market value, it may result in double taxation.

For example, if you sell a property to your daughter for $5,000 and the fair market value of the property is $400,000 and the cost of the property is $5,000, you will have deemed proceeds of $400,000. You will have a capital gain of $395,000 ($400,000 less $5,000) of which half will be taxable. However, your daughter’s cost will be $5,000 and if she sells to a third party at a later date for $400,000, tax will apply on the same gain, hence double taxation.

If you sell a property to your brother for $450,000 and the fair market value of the property is $400,000 and your cost of the property is $5,000, you will have deemed proceeds of $450,000. However, your brother will have a deemed cost of $400,000. When your brother sells the property at a future date, again there will be double taxation.

However, when gifting real estate to family members for nil consideration, there is a deemed disposition at the fair market value. The recipient will have a cost base at fair market value resulting in no double taxation.

Visit this Government of Canada web page to learn more about Transfers of Capital Property.

https://www.manningelliott.com/blog/gifting-real-estate-family-members-canada