What is the spousal rollover and how does it reduce estate taxes?

The spousal rollover is a federal income tax provision that allows capital property to be transferred to a surviving spouse or common-law partner at the deceased's cost base — rather than at fair market value — deferring the capital gains that would otherwise be taxable on the terminal return.

For example, if you own stocks with an accrued gain and leave them to your spouse, the deemed disposition on death is treated as occurring at the original cost, so no capital gains tax is triggered at your death. The gain is instead recognized when your spouse eventually sells the assets or dies.

The rollover applies automatically for assets left directly to a surviving spouse or to a qualifying spousal trust. The executor can also "elect out" of the rollover for specific assets — for instance, to use capital losses, access the capital gains exemption, or take advantage of low marginal rates in the terminal year.

This is one of the most important estate planning tools for married couples and common-law partners. Understanding when to use it, and when to elect out, requires coordinated advice from both an accountant and a lawyer.