TSG (Tax Specialist Group) - Opting Out of Spousal Rollovers (Spousal Rollovers)

hen capital property is transferred to a taxpayer’s spouse, the taxpayer normally recognizes no gain or loss for Canadian tax purposes. This rule applies for both inter vivos and testamentary transfers.

However, a taxpayer can opt out of this “rollover” rule and realize a gain if desired. The election to have the transfer occur at fair market value can be made on a property-by-property basis. For example, if H transfers 100 shares of a company to his wife W, then H can elect to realize a gain on 75 of the shares. (This is done by H electing in his tax return to have subsection 73(1) of the Income Tax Act not apply to those 75 shares). The remaining 25 shares would be subject to the automatic rollover.

This strategy can be particularly useful in many situations. For example, electing to realize a gain can allow the transferor to use loss carry-forwards. The transferor could eliminate tax and the recipient spouse would have a new adjusted cost base equal to the fair market value of the property. This is also useful where the $750,000 Lifetime Capital Gains Exemption can be used. Similarly creating a gain can make use of otherwise unused charitable donation tax credits or carried-forward alternative minimum tax.

A similar rollover rule applies to a transfer to a child or grandchild of property that is qualified farm property or shares of a qualified family farm corporation. However, in these cases the transfer of farm property or farm shares can occur at any elected amount between the adjusted cost base of the property and its current fair market value. For transfers of regular property between spouses, the transfer is either at the adjusted cost base or the full fair market value. There is no ability to elect at an amount between the two.

While tax rollovers are often desirable, there are situations where they are not optimal.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.