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Finance

How capital gains tax on property is divided in a divorce


Tax implications of transferring an asset to a spouse

When you transfer an asset to a spouse, there are generally no immediate tax implications. By default, the asset transfers at its adjusted cost base (or the undepreciated capital cost for depreciable property) with no capital gain triggered, unless you elect otherwise.

There may be subsequent tax implications due to the spousal attribution rules, however. Future income—like dividends, interest, rental income or capital gains—may be attributed back to the transferring spouse and taxed to them.

In the event of a separation or divorce, Kay, the same tax-deferred rollover can apply if the transfer is made as part of a separation or divorce settlement. This applies for both common-law and legally married spouses. The attribution rules no longer apply after a relationship breakdown either, so the receiving spouse is responsible for future income tax.

What this means in your case, Kay, is that you and your ex-husband can transfer ownership of the three properties between each other as part of your divorce settlement without triggering capital gains tax. You mentioned that one of the three properties is in your name and the other two are jointly owned. This tax-deferred transfer option would apply for all three properties, regardless of whose name(s) a property is in and which of you receives the transfer.

Now that we have determined that no immediate capital gains tax implications will result unless you elect otherwise, we need to consider what capital gains tax may apply to one or both of you in the future.

Can you avoid capital gains tax in a divorce?

The principal residence exemption allows a couple to claim an eligible property as their tax-free principal residence for a particular tax year. An eligible property is one that a couple ordinarily inhabits. It can include a cottage, vacation property or other property that may not be their main residence or place where they mainly reside.

You and your ex-husband, Kay, own a home and two investment condos. Assuming the two investment condos have been rental properties, there is deferred capital gains tax to the extent they have appreciated in value. You and your ex-husband may only be able to claim the principal residence exemption for your home, assuming you have not done so for any other property you both owned previously during the years you’ve owned your matrimonial home.

If your husband moves into one of the investment condos, that act alone will not be enough to negate the deferred capital gains tax. Moving into an investment property and selling it does not allow you to claim the principal residence exemption and avoid tax on historical appreciation. In fact, moving into it may trigger capital gains tax to become payable since the property is subject to a change in use from income-producing to personal use. This results in a deemed disposition or notional sale of the property at the fair market value.



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