Tag: capital gains
Our blog has previously covered the issue of inheritance tax.
As a reminder, inheritance tax is charged on estates of a certain value or greater on a percentage basis. Smaller estates (different amounts depending on the jurisdiction) may be exempt, with the applicable tax charged on the portion of the estate exceeding the exemption limit. Inheritance tax does not apply to Canadian estates or their beneficiaries. While we see individuals go to great lengths to avoid the payment of Estate Administration Taxes payable on assets administered under a probated will in Ontario and other provinces, the rate (at approximately 1.5% in Ontario) is significantly lower than what we see in jurisdictions where estates are subject to inheritance tax (up to 55% in Japan).
In particular, we have covered a number of developments in U.S. inheritance tax, which saw some fluctuations during Donald Trump’s presidency. Trump had proposed the elimination of inheritance taxes all together. More recently, President Joe Biden’s government has been considering a number of measures to increase the taxation of large estates: the reduction of the estate tax exemption to $3.5 million (from $11.7 million), increasing inheritance tax rates from 40% to 65%, and/or increasing taxes on capital gains in respect of inherited assets. News reports suggest that there has been resistance to the proposed increased tax burden to estates as the proposed increased capital gains tax makes its way through congress. However, the measures proposed by President Biden could generate an additional $213 billion to $400 billion over the next ten years.
Having just seen another federal election in Canada, it is interesting to follow along with how inheritance tax has been used as an important part of political agendas in other jurisdictions. It will be interesting to see if inheritance tax or other taxes applied to estates become part of political platforms locally in coming years, as we continue to approach the greatest ever transition of wealth from one generation to the next.
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As it is Valentine’s Day, our discussion today will consider, naturally, love and affection.
Real property can be gifted to loved ones. If there is no consideration of monetary value, then there will be no Land Transfer Tax payable on the transaction. In the Land Transfer Tax Affidavit, which must be filed when any transfer is registered in Ontario, the transfer is said to be for “natural love and affection”.
Although not specifically exempt from taxes, a transfer for “natural love and affection” is considered to be a transfer for nil value, and therefore, no Land Transfer Tax is payable.
“Love”, as most poets know, is hard to define. There is no definition in the tax legislation. Further, it is not clear what “unnatural” love or affection is.
In certain cases, gifts to non-arms’ length parties may also not attract Land Transfer Tax. For example, a gift to a charity may not be subject to Land Transfer Tax.
If the gift includes the assumption of a mortgage or other liabilities by the receiver, then the value of the mortgage or liability assumed by the receiver is of value to the donor, and must, in most cases, be included in the Land Transfer Tax Affidavit. Land Transfer Tax will be payable on the value of the mortgage or liability assumed. I say “in most cases” because there is an exemption where the transfer is between spouses or former spouses: see R.R.O. 1990, Regulation 696.
Further, if the receiver is not a spouse and the land was subject to a mortgage that was paid off by the receiver, Land Transfer Tax will be payable on the value of the mortgage paid off.
When gifting real property, keep in mind that while Land Transfer Tax may not be payable, this does not mean that income taxes are not payable. In many cases, the gift will trigger a deemed capital gain on the part of the donor.
For more information, see the Ontario Ministry of Finance bulletin, here, and the Government of Ontario publication, “A Guide for Real Estate Practitioners: Land Transfer Tax and the Registration of Conveyances of Land in Ontario”, here.
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I try to seize every opportunity I can to learn about art. In preparing today’s blog, I was intrigued to read about the UK’s Cultural Gifts Scheme and its relationship to estates.
The Cultural Gifts Scheme & Acceptance in Lieu allows UK taxpayers to donate important works of art and other heritage objects in return for a tax reduction, which includes inheritance tax. The donated work is then held for the benefit of the public or the nation at an eligible museum or gallery. According to this article from the Guardian, the Scheme was first introduced in 1910 as a way of allowing individuals to offset inheritance tax bills, and later, in 2013, to allow individuals to be able to make donations during their lifetime in order to offset future tax liabilities.
Any art admirer should have a look at the 2018-2019 Annual Report which provides a list of items that were received, along with some pretty pictures of the items :). It is a feast for the eyes and the senses. Some of the highlights include:
- a Portrait of the Emperor Charles V by Peter Rubens, which has gone to the Royal Armouries in Leeds
- a platinum and diamond necklace with black velvet ribbons, convertible to a brooch, made by Cartier in Paris c. 1908-1910, which has been allocated to the Victoria and Albert Museum
- 361 botanical drawings by the illustrator Florence Helen Woolward
- Bernardo Bellotto’s painting of Venice on Ascension Day, which settled £7 million of tax
- Damien Hirst’s Wretched War sculpture, given by the artist’s former business manager Frank Dunphy settling £90,000 in tax
In Canada, although art can be subject to capital gains, and possibly other taxes, it is possible for a donor to limit, or avoid the tax altogether, including by way of claiming a charitable tax credit. Individuals thinking about estate planning and/or donating art should seek the advice of a professional advisor to maximize the amount of savings.
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