In general, the deemed disposition rules (click here to learn more about deemed dispositions) do not apply to transfers between spouses.
Assume that you bought shares of a major Canadian bank in
1972 for $100. Since 1972, those shares
have increased in value to $1,000. You
can transfer the shares to your spouse without triggering any capital gains
tax. In this case, your spouse would step
into your shoes as far as ultimate tax liability is concerned. The spouse would be considered to have paid
$100 for the shares. If the spouse later
sells the shares for $1,500, the capital gain will be equal to $1,400 (a
combination of the increase in value during the time that you owned the shares
and the increase in value during the time that your spouse owned the shares).
The above rule is sometimes referred to as the “spousal
rollover” rule because the transferred asset “rolls over” to the spouse without
any immediate income tax consequences.
The term has nothing to do with other spousal activities and can be used
in polite company.
An asset transfer between spouses can be effected on a
tax-free basis in the sense that no income tax is payable at the time of the
transfer. However, it is important to
remember that this is just a tax deferral.
No tax saving results – just a
postponement of the tax liability to a point further down the road.
A similar “spousal rollover” rule applies on death. If you die and your spouse survives you, you
can leave all your property to your spouse without triggering a deemed
disposition of that property. Your
spouse then steps into your shoes:
capital gains tax will apply when your spouse sells or gifts the property
or on the death of your spouse (whichever occurs earliest). That capital gains tax will include tax on
any increase in value that occurred while you owned the property. Again, this is merely a deferral of tax and
not a saving of tax because the surviving spouse will eventually die.
Actually, it is possible to defer capital gains tax
indefinitely if the surviving spouse always remarries a much younger individual
and leaves property to that much younger spouse, who then remarries on the
death of the older spouse and so on ad
infinitum. However, this strategy
has never actually fit into anyone’s long-term estate plan. The children might have objections.
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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.