In general, if you gift an asset to someone at a particular time, you are deemed to dispose of the asset at fair market value at that time, triggering any unrealized gains or losses.  The recipient of the gift, in turn, is deemed to acquire the asset at that fair market value.

There are some exceptions, most notably gifts to a spouse or to a spousal trust, an alter ego trust, or a joint partner trust.  There are also special rules for losses on transfers between affiliated parties, which may suspend any losses triggered or embed them into the cost base of the assets transferred.

If you sell an asset to a non-arm's length person at a particular time, you are required to set the sale price equal to the fair market value of the asset.  If the sale price is less than fair market value, you are deemed to have sold the asset for fair market value anyway, without a compensating increase in the cost base for the purchaser.  If the sale price is greater than fair market value, the purchaser's cost base is reduced to fair market value, without a compensating reduction in your proceeds of disposition.  In both cases, the one-sided adjustment can be quite punitive, so it pays to carefully consider and document fair market value in all non-arm's length sales.

If you plan to gift, sell, or transfer an asset to a non-arm's length person, contact a Chartered Accountant to help you assess the income tax implications and planning options.

Information for Tax Tips is provided as a public service by the Chartered Accountants of British Columbia.