Why would I be required to pay taxes on money sent from family members?

[Real Case] ​​Xiaoli is an international student pursuing a master's degree in Toronto. Her parents send her 20,000 to 30,000 Canadian dollars annually from China to cover rent, tuition, and living expenses. One day, Xiaoli's bank suddenly called, saying her account had received a remittance of over 10,000 Canadian dollars from overseas and she needed to provide "proof of the source of funds," otherwise her account would be frozen. Xiaoli panicked immediately, thinking the money would be taxed. She couldn't sleep that night, wondering if even money from her parents was taxable.

Common Misconceptions and Corrections

Clearly explaining "where the money came from, why it came, and whose account it went into" minimizes risk. Here's a breakdown:

1) Essentially "Income," Not a Gift

Providing labor/services to family members overseas or their companies (coding, design, live-streaming sales, etc.), even if the money comes from your parents, is essentially employment or self-employment income and should be declared in Canada.

Selling or receiving payments on behalf of family members overseas is considered business income.

Key considerations: Whether there was consideration, whether it was continuous, and whether it directly corresponds to skill/time investment.

2) Source of funds is "asset disposal" or "investment income"

Selling stocks, crypto assets, or a house and transferring the money is taxed under Canadian tax law on global capital gains (if you are a Canadian tax resident). If the disposal occurs in your name, you should report the corresponding capital gains.

Receiving only gifts (e.g., parents giving you cash after selling a house) is not taxable; however, if you use this money to invest and generate interest/dividends/capital gains, these subsequent gains are taxable. Canada does not have a gift tax, but investment income must be reported.

3) Money deposited into a "company account" is considered business-related.

If money is deposited into your company's bank account, the tax authorities are likely to presume it as business income unless you can prove it's shareholder investment or the company borrowing from you (requiring board resolutions/purpose of funds/accounts/agreements).

Conversely, money deposited into a personal account may also be related to the company (e.g., a customer mistakenly pays you personally), and the accounts should be adjusted accordingly, with evidence retained.

4) Unclear distinction between "loans" and "gifts"

If a loan is written as a loan but lacks a promissory note, interest rate, term, and repayment records, and is subsequently not repaid, it is highly likely to be considered disguised income or a point of contention.

Interest-free loans between relatives and friends to adults are not taxable in themselves, but loans used for investment may involve attribution rules/interest deduction arrangements, requiring careful planning of the document and purpose.

5) "Gifts" in employer/employee scenarios

Gifts or bonuses from employers are usually taxable benefits/income (non-cash gifts may be exempt under certain threshold policies; cash/near-cash gifts are almost always taxable). If your "family company" is your employer, this rule also applies.

6) Anti-money laundering audits do not equal taxation, but you must be able to prove your innocence.

For cross-border wire transfers ≥$10,000, banks/reporting entities must report to FINTRAC as required by regulations; splitting within 24 hours may still result in combined calculations. This is a compliance review, not the same as paying taxes, but it may raise questions about the source of funds. You will need to prove that the funds are from legitimate sources such as gifts, loans, or investments.

7) Don't confuse this with the "Foreign Asset Declaration" of T1135.

Receiving gifts does not equate to holding "specific foreign assets." T1135 requires you to declare specific foreign assets (such as overseas stocks, overseas rental properties, overseas funds, etc.) with a cost value > $100,000 at any point during the year. Cash remittances from overseas relatives are generally not considered "specific foreign assets" under T1135.

How to handle the follow-up case? Pay taxes on money sent from family?

The next day, she came to us. I asked her to prepare three things:

• A gift letter signed by her parents, stating that the money was for their daughter's tuition and was a gratuitous gift;

  
  

• Bank remittance slips and transfer records;

  
  

• Her tuition bill.

We compiled these documents together and submitted them to the bank. Three days later, the account was unfrozen, and everything was normal.

I told her, "There is no gift tax in Canada, so this money won't be taxed. The bank is simply fulfilling its anti-money laundering reporting obligation (FINTRAC), not conducting a tax audit."

Advanced Compliance and Tax Planning Advice

• Gifts to individuals, investment to companies: Avoid directly depositing "gifts" into company accounts; if investment is necessary, ensure a board resolution, investment agreement, and accounting entries are complete.

  
  

• Gifts as investments: If gifts are invested in an investment account, investment income must be reported annually for tax purposes; if a relative or friend "lends" you for investment, consider a written loan agreement and agreed-upon interest rate. For more advanced cases, research loan rules regarding interest rates and attribution.

  
  

• Large/frequent receipts: Use a standardized description template (purpose of gift + source), regularly file supporting documents, and submit all documents at once if there are bank compliance or CRA inquiries.

  
  

• Interjurisdictional families: If the donor is a U.S. citizen/green card holder, they may have gift tax reporting obligations in the U.S. (which differ from your Canadian tax obligations). Interjurisdictional families need to consider both sides.