Canada: Marriage In Canada - The Marital Deduction And Other Tax Relief And Property Rights On Marital Breakdown And Death

Last Updated: October 12 2018
Article by Margaret R. O'Sullivan

- A majority of the Carter Commission advocated a "comprehensive tax base", as "[t]he first and most essential purpose of taxation is to share the burden of the state fairly among all individuals and families." (Report of the Royal Commission on Taxation, as cited in Duff, infra, at 91).

- With regard to capital gains the Carter Commission recommended the recognition of capital gains and losses on a realization basis (and upon gifting or death) rather than an accrual basis, for administrative reasons. It also recommended that the value of gifts and inheritances be included in income, which was not implemented, and that wealth taxes be repealed accordingly. The inclusion rate of 50% was a political concession upon reactions to a government White Paper.

- Valuation date: December 31, 1971.

- The federal government's reasons for the repeal of federal gift and estate tax included concerns about the substantial cumulative impact in certain cases of both estate taxes and capital gains taxes.

- After 1972, provincial estate and/or gift taxes were not uniform across the provinces. Many provinces ceased levying wealth transfer taxes during the 1970s, and by 1985 no province levied such taxes.

- See David G. Duff, "The Abolition of Wealth Transfer Taxes: Lessons from Canada, Australia and New Zealand", 3 Pittsburgh Tax Review 71 (2005) .

- Generally, Canada includes in income for taxation purposes a portion of capital gains, being the growth in the value of non-inventory capital property on the disposition of that property. The Income Tax Act (Canada) defines a capital gain as the difference between the proceeds of disposition of an asset (for example, its sale price) and its adjusted cost base, less outlays and expenses of disposition.

- A taxable capital gain is 50% of a capital gain. Allowable capital losses may be deducted from taxable capital gains for a taxation year.

- A disposition is broadly defined as "any transaction or event entitling a taxpayer to proceeds of disposition of the property" (s. 248(1)), and includes a sale and any transfer where there is a change of beneficial ownership, including gifts, resulting in a disposition of capital property. There is a deemed disposition of capital property at fair market value immediately before a taxpayer's death. Generally, there is a deemed disposition of capital property held in a personal trust every 21 years (21 years after the creation of the trust or 21 years after January 1, 1972, whichever is later).

- "Rollovers" permit deferral of recognition of capital gains or losses, typically by allowing another taxpayer to receive capital property at the original taxpayer's adjusted cost base – for example, for a transfer of capital property to a Canadian resident surviving spouse or common-law partner or qualified spousal trust during lifetime and on a spouse's or partner's death.

- A lifetime capital gains exemption can shelter $800,000.00 of capital gains from limited sources, including qualified small business corporation shares, qualified farm property and qualified fishing property.

Image

Tax Filings

For the purposes of Canadian federal income tax, married spouses (whether they are of the same-sex or opposite sex) are required to indicate their marital status as of December 31 of the tax year for which a filing is being made, as well as report the name, social insurance number and net income of their spouse. Each spouse files a separate return—Canada does not have a spousal joint-filing system as in the U.S. Note that all of the following comments also apply to common-law spouses who meet the following statutory requirements for a "common law partner" under s. 248(1) of the Income Tax Act:

"common-law partner", with respect to a taxpayer at any time, means a person who cohabits at that time in a conjugal relationship with the taxpayer and

  1. has so cohabited throughout the 12-month period that ends at that time, or
  2. would be the parent of a child of whom the taxpayer is a parent, if this Act were read without reference to paragraphs 252(1)(c) and (e) and subparagraphs 252(2)(a)(iii),

and, for the purpose of this definition, where at any time the taxpayer and the person cohabit in a conjugal relationship, they are, at any particular time after that time, deemed to be cohabiting in a conjugal relationship unless they were living separate and apart at the particular time for a period of at least 90 days that includes the particular time because of a breakdown of their conjugal relationship.

As the thrust of this presentation is "marriage" in Canada, however, all references will be to legally married spouses. Personal tax returns are due to be filed with Canada Revenue Agency on or before April 30 of the year immediately following the taxation year.

Tax Credits

For married spouses, there are a variety of tax credits that may be claimed. For example, there are credits available to be claimed with respect to supporting a financially dependent spouse at any time during the tax year whose net income was below the threshold amount. Other credits and amounts, such as age and tuition amounts, may be transferred between spouses in order to minimize the total tax payable as between spouses. Married spouses may also combine certain other credits such as medical expenses and charitable donations by claiming such amounts on one spouse's return in order to obtain the maximum credit available. Other credits or benefits, however, such as the Canada Child Tax Benefit, may be reduced or lost entirely when using a combined net family income to calculate the income threshold for such benefits.

Income Splitting

There are a variety of income splitting strategies available to married spouses in Canada. With respect to retirement savings plans (RSPs), the higher income spouse is permitted to use his or her contribution room to make contributions to a spousal RSP held by the lower income spouse. Contributions to the lower income spouse's RSP would be deducted from the income of the higher income spouse. Further, when funds are ultimately withdrawn by the lower income spouse during his or her retirement, any such withdrawals are fully taxable in his or her hands. With respect to retirement income funds (RIFs), income paid from the RIF is eligible to be split between the spouses if both are 65 years of age or older.

In terms of further income splitting opportunities, if both spouses are over the age of 60 years and receive monthly Canada Pension Plan payments, they may share up to 50% of the benefits earned during the period of their relationship. Pension income splitting allows spouses receiving income that qualifies for the pension income credit to allocate up to 50% of that income to their spouse. In addition, pension income from a defined benefit or defined contribution pension plan may be split with a spouse at any age.

Tax-Deferred Spousal Rollovers

Transfer during lifetime:

A spouse may, during his or her lifetime, transfer non-registered assets to his or her spouse outright without triggering tax on capital gains. The income attribution rules (discussed in greater detail below) will, however, apply to such assets so transferred.

A spouse, if he or she is 65 years of age or older, may also transfer assets into a joint partner inter vivos trust, which would permit a spousal rollover of the assets held in the trust to the surviving joint partner (i.e., his or her spouse) on a tax-deferred basis. To qualify as a joint partner trust, income must be paid to the settlor and his or her spouse, and tax on such income is paid by the settlor and his or her spouse at his, her or their respective graduated tax rates unless a special tax election is made to tax the income in the trust. Further, there is a deemed realization of the assets of a joint partner trust on the date of death of the survivor of the partners, as well as every 21 years thereafter unless an election is made to trigger an earlier disposition. Due to the deemed realization, tax is payable on any taxable capital gains.

Upon death:

Upon death of one spouse, RSPs and RIFs can be transferred to the surviving spouse on a tax-deferred, rollover basis.

Moreover, other capital property may be transferred on death to a surviving spouse through a deceased spouse's will without triggering tax on capital gains. Such rollovers on death may be accomplished through either an outright distribution in the deceased spouse's will, or by way of transfer to a qualifying spouse trust. A qualifying spouse trust is a trust whereby the surviving spouse is entitled to receive all of the income that may arise during the lifetime of the spouse. The surviving spouse is the only person who can receive, use or have the benefit of, any income or capital of the trust during his or her lifetime. The spousal rollover will usually apply to a transfer of property to a spousal trust if all of the following requirements are satisfied: (a) the deceased spouse was resident in Canada prior to his or her death; (b) the trust is resident in Canada immediately after the property is transferred to it; and (c) the property so transferred vests indefeasibly in the spousal trust within 36 months after the death of the deceased spouse. This vesting period may be extended at the discretion of the Minister of National Revenue within the 36-month period.

A Tax Free Savings Account (TFSA), which offers tax-free growth of amounts held in the account, can also be transferred on a tax-free basis to a surviving spouse.

Attribution Rules

As noted above, non-registered assets can be transferred from one spouse to another during their lifetimes outright on a tax-deferred basis without triggering tax on accrued capital gains. In this instance, however, the attribution rules will attribute any subsequent income or gain earned on the asset back to the transferring spouse. There are certain strategies though that can be used to avoid attribution in certain situations.

Reduced Availability of Principal Residence Exemption

If prior to marriage both spouses own a home and they continue to each own a home upon moving in together in one of the homes, there may be reduced availability of the exemption on both properties and taxable capital gains may potentially arise when the one property is eventually sold. The principal residence exemption is available only to one family unit if the taxpayer is designating a property as his or her principal residence for 1982 or any subsequent year, which includes, in addition to the taxpayer, the following persons (if any):

  • The taxpayer's spouse or common law partner throughout the year, unless the spouse or common-law partner was throughout the year living apart from, and was separated under a judicial separation or written separation agreement from, the taxpayer; and
  • The taxpayer's children, except those who were married, in a common-law partnership or 18 years of age or older during the year; and
  • Where the taxpayer was not married, in a common-law partnership or 18 years of age or older during the year:

    • The taxpayer's mother and father; and
    • The taxpayer's brothers and sisters who were not married, in a common-law partnership or 18 years of age or older during the year.

To view the full article click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Margaret R. O'Sullivan
Similar Articles
Relevancy Powered by MondaqAI
Davies Ward Phillips & Vineberg
Minden Gross LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Davies Ward Phillips & Vineberg
Minden Gross LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions