Friday, August 7, 2015

Canadian Tax Primer 8: Deemed Dispositions

As noted in Tax Primer 7, Tax is triggered by specific events (such as the sale of an asset).  Some events, while seemingly innocuous in real life, can trigger a deemed disposition of an asset – a disposition that occurs without an actual sale of the asset.

A deemed disposition is a bit of income tax make-believe.  In certain circumstances, income tax legislation will deem you to have sold assets for fair market value proceeds (even though you did not in fact sell the asset and even though you have not actually received any money).

The most common deemed disposition events are gifts and death.  Giving up Canadian residence can also result in a deemed disposition of assets, but that will be discussed in a separate article.


You may have heard that Canada does not have a gift tax.  Technically, that is a true statement.  What Canada has, however, is a deemed disposition of a gifted asset.  For example, assume that you own a painting by A.J. Casson, one of the Group of Seven painters.  Assume that you paid $10,000 for the painting and that it is now worth $100,000.  If you decide to give it to your son for his 40th birthday, the Income Tax Act will deem you to have sold the painting for $100,000.  You will have a capital gain of $90,000 and will have to pay the government for the privilege of being generous to your son.  In other words, the gift to your son also results in a forced “gift” to the government.

This is technically not a gift tax because the tax applies only to the gain and not to the entire value of the gift.  In the case of an asset with a very low cost and a very significant gain, however, this distinction has no substantive difference.  A tax is a tax is a tax.

Of course, a gift of Canadian cash will not attract any tax.  If you have $100 in Canadian cash, you have already paid tax when you earned that cash.  Accordingly, you can gift the $100 in Canadian cash to your son without having to pay tax.  The deemed disposition rules trigger tax only in respect of assets that have increased in value.  The tax applies to the increase in value since the date on which the asset was acquired.  If the asset was acquired before 1972, the Income Tax Act taxes only the increase in value since 1972.


Nothing is surer than death and taxes.  In Canada, death and taxes go together.

On death, the deceased is deemed to dispose of all assets for fair market value.  An exception applies in respect of assets transferred to a surviving spouse of the deceased, but this merely defers the deemed disposition to the death of the surviving spouse.

The deemed disposition on death may well produce very significant capital gains tax.  For example, assume that you decide that your 40-year-old son is too young to have a Casson painting and you decide to keep the painting until your death.  In your will, you bequeath the painting to your son.  On your death, you will be deemed to have disposed of the painting for its fair market value (measured at the time of your death).  If the painting has increased in value to $200,000 by the time of your death, you will now have a deemed capital gain of $190,000.  As well, you may have a capital gain on other assets that you own at the date of your death.

While the Canada Revenue Agency would not be able to come after you personally for the taxes – there is no taxation beyond death (yet) – the executor of your estate would have to pay this tax bill before distributing assets to your heirs.  Taxes are a major cause of estate shrinkage.  The heirs receive only what is left after the payment of taxes.

Technically, Canada does not have an estate tax.  However, the deemed disposition on death provisions are a form of estate tax in everything but name.

It is usually advisable to take steps to manage the amount of tax that will arise on death so that you heirs are not forced to sell valuable investment assets in order to pay tax.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.