Who hasn't heard of $1 sales? A person sells an asset to a relative for a ridiculously low price or simply gives it away. But what are the tax consequences of such actions?
Un cas de plus en plus fréquent : les gens donnent leur héritage de leur vivant. Si grand-maman veut donner son chalet à sa fille après avoir décidé de déménager dans une résidence pour personnes âgées, elle va devoir s’imposer comme si le chalet avait été disposé à la juste valeur marchande. Cette disposition présumée aux yeux du fisc au moment du don peut provoquer un impôt à payer et pourrait mettre la grand-maman dans une fâcheuse situation si elle ne dispose pas des liquidités nécessaires pour régler cette dette fiscale.
Faced with this presumed disposition at fair market value at the time of the gift, Grandma might be tempted to proceed otherwise and might consider selling for less than fair market value (FMV), or even for $1. But then, the result would be worse because the gain on the disposition of the property would be taxed not once but twice.
To illustrate, let's assume that the cottage is worth $300,000 on the real estate market and that Grandma decides to sell it to her daughter for $200,000, the price she originally paid for it. Grandma would then be taxed as if she had disposed of the property for $300,000 and would realize a capital gain of $100,000, which is the difference between the FMV and the cost she originally paid.
If her daughter decided to sell the cottage later at the FMV of $300,000, she would also have to report a capital gain of $100,000, which is the difference between the proceeds of disposition and the $200,000 cost she originally paid. Thus, there is double taxation because the $100,000 that Grandma tried to avoid by lowering the sale price from $300,000 to $200,000 is ultimately taxed twice.
Let's say that Grandma owns stock in the stock market that she would like to pass on right away. Again, she might be tempted to sell them to her daughter for less than FMV and she would be subject to the same consequences as on the disposition of the cottage.
Let's continue with our example. Now in her new home, Grandma realizes that she doesn't really need her car anymore and decides to give it to her daughter. When a vehicle is transferred between individuals, certain taxes apply, such as the Quebec Sales Tax (QST), which is calculated on the higher of the car's appraised value and the sale price.
If they are related by blood, marriage or adoption, there are no taxes to pay when a vehicle is given or sold between them. However, they will have to fill in a form at the SAAQ office to have their family relationship recognised. Some people who are not related by blood tend to declare a false sale price in order to have a smaller amount of taxes to pay, this is not without consequences and can lead to court cases.
You can see the importance of planning your transactions with your relatives. Above all, don't fall into the trap of selling your property for $1 or less than the fair market value because if the taxman catches up with you, you will pay double the price. It would be a shame if such a thoughtful act created friction or frustration.
Source : Article by Noémie Beaudoin on the lesaffaires.com on the 11th march of 2022
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