Capital Gains Tax When Transferring the Home on Separation in Ontario

If you are signing over a house, cottage or rental property to a spouse as part of a separation, you may worry that a large tax bill is coming. Often the transfer itself does not trigger tax, but there are exceptions and later consequences.

This article explains the federal rollover rule, the situations where it does not apply, and related tax points on separation. It is general information, and an accountant should confirm how it applies to your numbers.

The spousal rollover

Under Income Tax Act s. 73(1) and (1.01), capital property such as a house, cottage or shares, transferred to a spouse or common-law partner, or to a former spouse or partner in settlement of rights arising from the relationship, rolls over at the transferor's adjusted cost base. No capital gain is triggered at transfer unless the transferor elects out in their return for that year.

In plain words, the receiving person generally takes over the original cost. The gain is not wiped out. It is generally carried forward to the person who receives the property, to be dealt with when they later sell. Why a transferor might choose to elect out is a question for an accountant.

When the rollover does not apply

The rollover applies only if both the transferor and the transferee are resident in Canada at the time of the transfer. If either of you lives outside Canada, get tax advice before you sign.

The rollover is also not automatic in the sense that you can choose differently. If the transferor elects out in their return for the year, a gain can be triggered.

Homes, cottages and rental properties

The rollover rule refers to capital property, and it names houses, cottages and shares as examples. A rental property generally fits within that wording, but how gains and past rental income are treated is a matter for your accountant.

The principal residence exemption is a separate set of rules with its own conditions. Whether it can shelter a gain on your home or cottage, and which property it applies to if you have more than one, should be confirmed with an accountant before you sign an agreement.

From a family law angle, the property in question may or may not be a matrimonial home. A matrimonial home is property in which a spouse has an interest that is or was ordinarily occupied by the spouses as their family residence, judged at separation if they have separated, and a couple can have more than one. A cottage or rental may qualify depending on how it was used.

Related tax points on separation

• Attribution: income attribution does not apply to income from transferred property for the period the spouses live separate and apart because of relationship breakdown. Capital-gain attribution is switched off only if both spouses file a joint election with the transferor's return.
• RRSPs and RRIFs: CRA Form T2220 is used to transfer all or part of an RRSP or RRIF directly to the current or former spouse's or common-law partner's RRSP or RRIF on relationship breakdown.
• Conditions: the transfer must be direct, the recipient must be entitled under a decree, order, judgment or written agreement dividing property, and for unmatured plans the spouses must be living separate and apart at the time.
• Withdrawing instead: if the RRSP holder withdraws the money and pays it to the spouse, the amount is taxable income to the holder in the year received.
• Spousal RRSP withdrawals: the rule attributing them back to the contributor does not apply if the spouses were living separate and apart because of relationship breakdown at the time of payment.

Whether an equalization payment is itself taxable is a question to put to an accountant before you agree on its form.

What to do next

• List every property being transferred, with the original cost and approximate current value.
• Collect purchase documents, renovation records and, for rentals, income and expense records.
• Confirm whether both of you are residents of Canada.
• Ask an accountant about the rollover, any election, and the principal residence exemption before signing.
• Raise the mortgage with your lender: each joint borrower is equally responsible for the unpaid balance, and separation does not change that contract.
• Have your lawyer and accountant review the separation agreement together, so the tax wording matches your intent.

Frequently asked questions