Who pays tax on cash gifts in Canada?

There may or may not be other tax implications, though. So, I will outline cases where tax may result from the act of giving or from a child earning income on a gift.

When does a deemed disposition apply?

If you transfer an asset to a child, this generally results in a deemed disposition. This means that when you transfer stocks or real estate or shares of a private company, it’s as if you sold these assets at their fair market value.

This deemed disposition applies during your life and upon your death. When you die, you are deemed to dispose of your assets. Only assets left to your spouse can be tax-deferred. Assets your children inherit are subject to tax payable by your estate before they are distributed.

However, unlike capital assets, cash does not appreciate in value. So, there’s no deemed disposition on cash, and there’s no tax to pay unless the cash is withdrawn from a tax-deferred account, like a registered retirement savings plan (RRSP) or a corporate bank account. In those cases, the withdrawal may be considered taxable income to the parent.

Income attribution rules

When you give cash to an adult child, all income and capital gains earned from that money are taxable to them.

When you give cash to a minor child and the gift is invested, there may be tax implications for you. Capital gains are taxable to the child. But interest and dividend income are attributed back to the parent. The parent must report this income on their tax return, even when the account is in a minor child’s name.

There may also be tax implications if you loan cash to an adult child for the purpose of investing. If the loan does not bear interest, or the interest rate is below the Canada Revenue Agency’s (CRA) prescribed rate at the time the loan is made—currently, the prescribed rate is 4%—interest and dividends are attributable to the parent. Capital gains are always taxed to the child, though.

The only way you can loan money to an adult child without parental attribution is to lend at a rate that matches the CRA prescribed rate at the time of the loan.