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Tax Issues from Receiving Land or Money from an Estate

Transferring land or money from a deceased family member’s estate may entail an unexpected future cost to the beneficiary.

Gifts That Come With Strings Attached

It is not unusual for family members to transfer property or money from one to another. Under the Canadian tax code, this gift giving is generally not taxable. Transferring a deceased family member’s estate represents the most common transfer of property.

Although welcome, these transfers of land and money may entail an unexpected future cost to the recipient, known as the transferee. This is because if the deceased had taxes owing, the Canada Revenue Agency will extract back taxes from whomever they are able to collect them.

If the person who transfers property, referred to as the transferor, owes taxes either in the year the transfer is made or in any year after that, the recipient becomes jointly liable for the back taxes. The liability is attached to any transfer for less than fair market value consideration between family members, which under the Income Tax Act is called a non-arm’s length transaction.

This applies to corporate and personal taxes. If the corporate transferor has income tax arrears, has failed to remit payroll withholdings (source deductions) for employees or has not paid GST collected by the corporation, these amounts owing become liable to the recipient. Because corporate directors are also legally responsible for ensuring CRA gets what it is owed, even a director’s assessment for the failure of the corporation to remit source deductions becomes the liability of the recipient.

CRA can trace all transactions between non-arm’s length parties. Such events are usually cause for closer CRA scrutiny, particularly if the transferor hasn’t paid their taxes.

For instance, if a couple jointly owns their house but one of them chooses to transfer their half-interest to the other for no consideration, then any unpaid tax debt of the transferor is now the liability of the recipient spouse.

If the spouse who transfers the half-interest is also a director-owner of a corporation that defaults on employee source deductions, GST payments or income taxes by going bankrupt, then the recipient may be liable for the taxes up to the full value of the transferred property.

There are legal defences against such a situation, but CRA is prepared to go to court and often wins its argument to transfer the liability for taxes to the recipient spouse or other family member.

There is no statute of limitations on this joint liability. The recipient can be assessed more than 20 years after the liability arose.

When accepting a cash gift or transfer of property, be mindful of the potential tax liabilities that could be attached to the assets.

Read the following Knowledge Centre articles for more information on family gifts as well as charitable gifts: