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Transferring property between common-law spouses

Region: Ontario Answer # 0126

 

The rules for transfers of property to a common-law partner are the same as for legally married couples.

Who is a common-law partner?

Under the federal Income Tax Act, a common-law partner is:

A person with whom you live in a conjugal relationship who is not your spouse, and he or she:

  • has been living with you at least 12 continuous months (includes any period you were separated for less than 90 days because of a breakdown in the relationship); OR
  • is the parent of your child by birth or adoption; OR
  • has custody and control of your child (or had custody and control immediately before the child turned 19 years of age) and your child is wholly dependent on that person for support.

Transfer of property to spouse or common-law partner is tax-free

Capital property, such as corporate shares or real estate can be transferred between spouses, whether legally married or common-law, on a tax-free basis. This also applies to transfers to a spousal or common-law partner trust.

At the time you make the transfer, depending on the type of property being transferred, your spouse or common-law partner is considered to have bought the capital property for the same amount that you are considered to have sold it for, which is:

If you want the transfer to take place at fair market value (FMV), you must file a special election requesting this treatment when you file your tax return for the year of the transfer.

Subsequent sale of property

Gain or loss taxed attributed to transferor

Although the initial transfer of property to your spouse or common-law partner is tax-free, you may have to report any capital gain or loss if the property is subsequently sold by your spouse or partner. You are usually required to do this if, at the time of the sale:

  • you are a resident of Canada; and
  • you are both still married or living in a common-law relationship.

Gain or loss taxed attributed to transferee

Fair market value

If the transfer to your spouse or common-law partner was made at FMV, and, if all of the following three conditions have been met, any subsequent capital gain or loss realized on a sale to a third party can be taxed in your spouse or common-law partner’s hands – rather than in your hands:

  • your spouse or common-law partner must have paid FMV for the property at the time of the transfer;
  • you made the FMV election; and
  • sufficient annual interest on any unpaid purchase price must have been paid in full no later than January 30 of the following year.

Sale after relationship breakdown

If at the time of the sale of the property that was transferred, you are living apart because of a breakdown in the relationship, you may not have to report the capital gain or loss; instead, you have to file an election with your income tax return. In such cases, the spouse or common-law partner who received the property (and then sold it) would have to report any capital gain or loss.

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