Is gifted money to spouse considered a taxable income? | General financial discussion | Discussion forum

Old Interpretation Bulletin IT-511R (Interspousal and Certain Other Transfers and Loans of Property) provides the parts of the Income Tax Act that deal with such attempts to split income:

Attribution of Income from Transferred or Loaned Property

2. Subsections 74.1(1) and 74.3(1) provide that where an individual has transferred or loaned property (including money) to the individual's spouse … any income or loss from the property or property substituted for it is deemed to be the individual's income or loss for a taxation year. …

Rules for gifts are different between the US and Canada.

In Canada, any gift including monetary gift is not taxable for the recipient.

There are few special cases, which probably do not apply to original question. Most notable among them are "gift from employer" and "gift from someone in debt to Canada Revenue Agency."

So A gives money to spouse B, no tax impact.

But, as Norman1 has helpfully pointed out, the subsequent income B earns from that money needs to be reported by A. So, yes, no point if the goal is to avoid taxes.

But if A loans money to B, i.e. bona-fide loan, then things are different. The subsequent income from that money is B's but A has to report interest income on the loan on at least the prescribed rate - currently at 2%, I believe. B may be able to deduct the interest paid A. (Plus I believe the prescribed rate at the time the loan was begun continues, even if CRA changes the prescribed rate later during the term of the loan.) Norman1 may elaborate if I've erred or missed something important.

Norman1 said
It is not considered to be income of the receiving spouse. But, there are attribution rules that deem the subsequent income generated by that gifted money to be taxable to the giving spouse.

Save2Retire@55 said

To the giving or receiving spouse? Then there is no point of playing the gifting game.

That's correct. The government saw people were doing this and brought in the attribution rules.

The gifted money itself is not taxable to the receiving spouse. However, any investment income generated by that gifted money is attributed back to the giving spouse and deemed to be earned by the giving spouse for income tax purposes.

Loonie mentioned an alternative, an spousal prescribed rate loan.

Instead of gifting, one spouse lends the money to the other spouse at a prescribed rate (currently 2% per annum). Borrowing spouse reports the investment income generated by the borrowed money and deducts the interest paid to the lending spouse. Lending spouse receives and reports the loan interest as interest income.

BDO Canada: Rates To Increase For Prescribed Rate Loans When Splitting Income has more details under the "Prescribed rate loans" section.

Save2Retire@55 said

Thanks, Norman. This is really helpful also it confuses me on how to calcualte it. It also says:

6. Income or loss derived from the investment or other use of the income from transferred property is not attributed to the transferor and thus for income tax purposes is income or loss of the transferee. For example, interest on any interest allowed to accumulate is not attributed to the transferor and is income of the transferee.

Am I doing the math correctly? It is getting confusing!

Let's say I gifted $1000. The $1000 generated $30 income from interest. I will be the one paying tax on the $30 in 2020.

In 2021, I gift another $1000. The total is now $2030. $60.9 income is generated in 2021. I should now pay the income tax on $30 portion of the $60.9 generated income and wife pays the tax on the other $30.9 generated income?

It's only first generation income that is attributed back. Income on the already-attributed investment income of previous years is not attributed back.

For year 2021 in your example, spouse has $2,000 of gifted money and $30 of already-attributed investment income from 2020. Together, they produce $60.90 of investment income.

$60.00 of that is from the $2,000 of gifted money and attributed back to you. $0.90 of that is from the already-attributed investment income and is not attributed back.

Save2Retire@55 said

Perfect. Guess CRA didn't leave us any choice of trying to balance the family income. Also, it is funny when they want to give anything (Child Benefit, etc), they do the math based on the whole family income but when we want to take any advantage, we have to do individuals. Oh well!

That's what happens when people start "abusing" the tax system.

It became highly unfair as wealthy taxpayers could benefit disproportionately by gifting spouses and children amounts like $100,000 to save their families thousands of dollars each year. Each child, for example, has a basic personal amount that could shelter over $10,000 of income a year.

Bill said
To me the success of the loan to spouse approach depends on the spouse being able to deduct the interest the giver has to pay tax on. To deduct interest on a loan in this case it has to be "borrowed money used for the purpose of earning income from a business or property". Would borrowing money to put into a HISA qualify? I doubt it but I'm not sure.
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Yes, it would. Anything that produced taxable interest or dividend income (in contrast to capital gains) does.