Make your own free website on Tripod.com

SPOUSAL ROLLOVERS

  1. What are spousal rollovers?
  2. What are the spousal rollover rules?
  3. Do the spousal rollover rules apply while I'm alive and upon death?
  4. Should I avoid holding my assets jointly with my spouse, due to the spousal rollover rules?
  5. Are spousal rollovers allowed to an inter vivos trust?
  6. Are spousal rollovers allowed to a testamentary trust?
  7. Do spousal rollovers while I'm alive allow me to avoid the attribution rules on future investment returns?
  8. Should I bother transferring assets to my spouse while I am alive, if the spousal rollover rules are available upon my death too?

1. What are spousal rollovers?

Spousal rollovers allow for a transfer of capital property to a spouse (including common law as of 1993) on a "tax deferred basis" (i.e. at the adjusted cost base, rather than fair market value).

2. What are the spousal rollover rules?

Transfers of capital property (while alive or upon death) to the spouse occur at adjusted cost base (or at undepreciated capital cost if the property is depreciable). However, the transferor may elect to have the transfer occur at fair market value - to make use of a capital gains exemption (Note: Only available for shares of qualified small business corporations and qualified farm property after February 22, 1994) or to offset a capital loss. Revenue Canada gives spouses a choice. Question 7 & 8 clarify the attribution rules that apply to spousal rollovers.

3. Do the spousal rollover rules apply while I'm alive and upon death?

Yes.

4. Should I avoid holding my assets jointly with my spouse, due to the spousal rollover rules?

No. The portion of the asset jointly held with the spouse is deemed to be disposed of at its adjusted cost base immediately prior to death. Therefore, a deemed disposal does occur on half of jointly held assets. The deceased can both avoid probate on jointly held assets (joint tenants) with right of survivorship plus make use of the spousal rollover rules with respect to the gain or loss on the portion of the asset owned by the deceased.

5. Are spousal rollovers allowed to an inter vivos trust?

Yes, but only if the inter vivos trust is a spousal trust. In order to qualify for the rollover, the settlor and the trust must be resident in Canada; all income of the trust must be allocated to the spouse while the spouse is alive; and only the spouse may receive or obtain use of any of the income or capital of the trust while the spouse is alive.

6. Are spousal rollovers allowed to a testamentary trust?

Yes, property that is transferred as a consequence of a person's death to a testamentary trust in favor of the deceased's spouse can be transferred on a tax deferred basis. There must be indefeasible vesting of the property in the trust within 36 months of the deceased's death and the terms of the testamentary trust must entitle the deceased's spouse to receive all of the income while the spouse is alive and must preclude any other person from receiving income or capital of the trust while the spouse is alive. Note that this rollover is only available if the spousal trust is resident in Canada. See the Testamentary Trust section for more information.

7. Do spousal rollovers, while I am alive, allow me to avoid the attribution rules on future investment income?

No. The spousal attribution rules continue to apply until the transferor dies, becomes non-resident or there is a marital breakdown. Both capital gains and simple (first generation) income attribute back to the transferor spouse. The One-Plus-One can be established to track the second generation income that is not subject to attribution.

8. Should I bother transferring assets to my spouse while I am alive, if the spousal rollover rules are available upon my death too?

It depends. You may want to income split while you are alive with a lower income spouse to the extent that the attribution rules allow you to income split as noted in Question 7. Perhaps you would also prefer to trigger a capital gain now, upon the transfer, by electing that the transfer occur at fair market value, if a capital gains exemption is available to you (Note that the $100,000 capital gains exemption was eliminated for gains accrued after February 22nd, 1994, except for shares of qualified small business corporations and qualified farm property) or to offset a capital loss. If you do not have a capital gains exemption, your capital assets can always be transferred to your spouse upon death at adjusted cost base, deferring the capital gain to the surviving spouse.

The final issue relates to ownership - how do you feel about having ownership in the name of your spouse? If that bothers you - you can loan property to your spouse. The loan could be forgivable at death, so that upon your death, there is no need to repay the loan. The will should provide which loans are to be forgiven on death. A loan is considered to be an asset so is normally included in probate; the forgiven loan is not. The loan principal amount (recalled or forgiven) is not included as income of the deceased or the estate. Any loan interest due, but not yet paid, upon death, is a right and thing of the deceased.