- Capital property transferred to a spouse or former spouse in settlement of rights arising from the relationship generally rolls over at the transferor's adjusted cost base, unless the transferor elects out.
- A direct RRSP or RRIF transfer on breakdown can be tax-free if conditions are met, but a withdrawal paid to a spouse is taxable to the holder.
- Whether an equalization payment is itself taxable should be confirmed with an accountant, as it depends on the facts.
Dividing property on separation can have tax consequences that are separate from the family law result. A house, cottage, shares or an RRSP can be handled very differently depending on how they are moved.
This article outlines the federal tax rules that commonly come up. Tax outcomes depend on your facts, so confirm the details with an accountant or lawyer before you sign anything.
Is an equalization payment taxable?
Equalization is the payment owed by the spouse with the higher net family property to the other, equal to one-half of the difference. The court may order payment, security, instalments or delayed payment for up to ten years, and may order property transferred, partitioned or sold.
Whether the payment is itself taxable is not something to assume. It is worth confirming with an accountant, especially if the payment will be made by transferring property or registered funds rather than cash.
If a court awards interest, prejudgment interest runs from the date the cause of action arose to the date of the order, and postjudgment interest runs from the date of the order. The court may disallow interest or change the rate or period where it is just. Interest rates are published quarterly, so check the current rate.
Transferring a house, cottage or shares
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.
The rollover applies only if both the transferor and the transferee are resident in Canada at the time of the transfer.
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.
RRSP and RRIF transfers
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 breakdown of the relationship.
- The transfer must be direct
- The recipient must be entitled under a court decree, order or judgment, or a written agreement dividing property
- For unmatured plans, the spouses must be living separate and apart at the time of the transfer
- If these conditions are met, the amount is not included in income
If the RRSP holder instead withdraws the money and pays it to the spouse, the amount is taxable income to the holder in the year received. The rule attributing spousal RRSP withdrawals back to the contributor does not apply if, at the time of payment, the spouses were living separate and apart because of the breakdown of the relationship.
Pensions and common-law partners
An order may provide for a lump-sum transfer out of a pension plan, or division of payments if the pension is already in pay. Under the Pension Benefits Act, the other spouse cannot receive more than 50 per cent of the imputed value of the pension.
Common-law couples are treated differently. Equalization applies only to a spouse as defined in the Family Law Act, which does not include unmarried cohabitants. Property generally belongs to whoever bought it, though a partner who contributed may have a claim. The federal tax rollover, however, refers to common-law partners as well as spouses.
A mortgage is a separate contract. Each joint borrower is equally responsible for the unpaid balance, and separation does not change that contract with the lender.
What to do next
- List the assets that will move, and how each will be transferred
- Ask an accountant whether the payment or transfer has tax consequences
- Confirm whether you or your spouse will elect out of the rollover
- Use direct transfers for RRSPs or RRIFs, not withdrawals
- Make sure your agreement or order supports the transfer
- Speak to your mortgage lender early if a house will change hands
Frequently asked questions
Is an equalization payment taxable in Canada?
This depends on the facts, including what is being paid and how. It is worth confirming with an accountant before you agree to terms.
Do I pay tax if I transfer the house to my spouse?
Capital property transferred to a spouse or former spouse in settlement of rights arising from the relationship rolls over at the transferor's adjusted cost base. No capital gain is triggered unless the transferor elects out. Both people must be resident in Canada.
How do I move an RRSP to my spouse without tax?
A direct transfer using CRA Form T2220 can be tax-free if the recipient is entitled under an order or written agreement dividing property. A withdrawal paid to the spouse is taxable to the holder.
Does a court order remove my name from the mortgage?
Separation does not change your contract with the lender, and each joint borrower is equally responsible for the unpaid balance. Whether your name can be removed is up to the lender, so speak with them early.
Sources
- Family Law Act, s. 5(1) (e-Laws) — Ontario e-Laws
- Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 128-129 (e-Laws) — Ontario e-Laws
- Pension Benefits Act, R.S.O. 1990, c. P.8, ss. 67.3(6), 67.4(5) (e-Laws) — Ontario e-Laws
- Ontario.ca – Dividing property when a marriage or common law relationship ends — ontario.ca
- FCAC – Disclosure of information to joint borrowers — canada.ca
- Income Tax Act, s. 73(1), (1.01) — Justice Laws (federal)
- Income Tax Act, s. 74.5(3) — Justice Laws (federal)
- CRA – T2220 form page — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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