Tax-Free Transfer of the Home Between Spouses on Separation

If you and your spouse are separating, one common outcome is that one of you keeps the home and the other is bought out or receives other assets. Many people worry that signing the home over will trigger a large capital gains tax bill.

In general, transfers between spouses are treated gently by the tax system, but there are traps in the paperwork, in who reports the gain later, and in the transferor's tax history. This article explains the basics so you know what to ask your lawyer and accountant.

The basic rule: transfers to a spouse happen at cost

CRA says you generally have no capital gain or loss if you give capital property to your spouse or common-law partner. The property is treated as transferred at its adjusted cost base (or undepreciated capital cost), not at fair market value.

This is often called the spousal rollover. The tax is not erased. How any gain is taxed later depends on the circumstances, so it is worth confirming with an accountant. Whether any tax is owed on a home also depends on the principal residence exemption, which is a separate question.

Who reports the gain when the spouse later sells

If spouses live apart because of a relationship breakdown, the transferor may avoid reporting the gain when the spouse later sells the property. To do that, the transferor must file an election with their return, which is a signed letter stating that section 74.2 should not apply, no later than the year the spouse disposes of the property.

This matters for negotiation. If nobody files the election, the gain could be attributed back to the person who transferred the property. Make sure your agreement says who will sign and file the election, and keep a copy.

Where the rollover applied on a transfer to a former spouse, the new owner can be treated as having owned the property for the transferor's ownership period, which can help with the principal residence exemption. Only one property per family unit can be designated, and a spouse living apart under a judicial separation or written separation agreement is excluded from the family unit for the year.

Paperwork for transferring a matrimonial home

A transfer or mortgage of a matrimonial home under Part II of the Family Law Act requires a spousal statement, such as a statement that the person consenting is the spouse, or that the spouse has released rights by separation agreement. A court order is the alternative. If a matrimonial home designation is on title, it stays on the parcel register until the registering spouse removes it.

Spouses can vary the default property rules by a domestic contract such as a cohabitation agreement or separation agreement. A marriage contract or cohabitation agreement must be signed by both parties in front of a witness, and the witness must also sign. What is required for a separation agreement is worth confirming with your lawyer.

• A written separation agreement or court order that sets out the transfer and any payment.
• The spousal statement or release needed for the land registry transfer.
• The section 74.2 election letter, if the transferor wants to avoid reporting the gain later.
• Mortgage lender consent or a refinance, if the home is mortgaged. The lender's terms vary.

Watch for tax-debt traps

If the person transferring the home owes tax, the transfer can create risk for the receiving spouse. Where property is transferred to a spouse, both people are jointly and severally liable under the Income Tax Act, up to the excess of the property's fair market value over the consideration given.

There is relief for a transfer made under a court order or written separation agreement while the spouses were living separate and apart because of a relationship breakdown, but only if the listed conditions are met. If you have any doubt about the transferor's tax position, raise it before signing.

What to do next

• Get a current valuation or appraisal if the transfer is part of a buyout. Who pays and the valuation date should be agreed in writing.
• Find the original purchase price and any improvements, so the adjusted cost base is known.
• Ask an accountant whether the principal residence exemption will cover the gain.
• Have your lawyer draft the separation agreement to include the transfer, the election and the tax responsibilities.
• Confirm the transferor has no outstanding CRA balance before the transfer is registered.

Doing these steps in order helps you avoid surprises. A lawyer and an accountant working from your actual documents can confirm how the rules apply.

Frequently asked questions