- One spouse owned a property before the marriage, and the property title is left in their name only.
- One spouse owns a business where they face a lot of liability. The property title may be registered in the other spouse’s name for creditor protection purposes.
- In a second marriage, a couple might own real estate as tenants in common, so that when they die, their individual shares of the property go to their children from the first marriage.
It is unclear why the rental property is just in your husband’s name, Iuliana. But there are a number of considerations we can address.
Converting a principal residence to a rental property
When you have a principal residence and you change the use of the property, you are deemed to have sold it at the fair market value at that time and to have immediately reacquired it at the same value. This may result in a capital gain or loss in the year the use changes, and this may have tax implications.
If the property qualified as your principal residence for all the years of prior ownership, there will be no tax payable. So, converting it to a rental property would have established the adjusted cost base for future capital gains tax. That is, unless you filed a subsection 45(2) election with the Canada Revenue Agency (CRA) at the time to continue to designate the property as your principal residence for up to four additional years. You may even be able to file this election retroactively.
The conditions for this 45(2) election require that you cannot designate any other real estate as your principal residence during those years, and you cannot claim any capital cost allowance (CCA)—or depreciation—against the net rental income reported on your tax return. You must also remain a resident or deemed resident of Canada. A case where you might do this is when you move into a home that you are renting, but you keep a previous home as a rental property. It may not be common, but it happens.
In some cases, you may be able to extend this four-year limit indefinitely if you live away from your principal residence because your employer, or your spouse’s or common-law partner’s employer, wants you to relocate.
Selling assets? Read our capital gains guide
Capital gains tax when the first spouse dies
When a taxpayer transfers assets to their spouse, Iuliana, those assets transfer at the original adjusted cost base by default. If this transfer is done during one’s lifetime, any subsequent income, including capital gains, are attributed back to the transferring spouse. (See my earlier column about the tax implications of giving your spouse money or assets to invest.)
When someone dies, if they leave their assets to their spouse, the same transfer at cost can apply. However, subsequent income is not attributable back to the first spouse. Subsequent capital gains can be taxed to the spouse who inherited the asset. As a result, there may be no capital gains on the death of the first spouse, so no tax payable by your husband when he dies if he leaves the rental property to you, Iuliana. Instead, you would pay all deferred capital gains when you sell the property, or you die and you are deemed to sell it.
The executor of the estate of the deceased can elect to trigger a capital gain on death for some or all of the deferred capital gain. This may be done if the deceased died early in the year and had little to no income, or if they have capital losses or other tax deductions or tax credits available to claim. These may be reasons to claim a partial or full capital gain by electing the transfer to happen at a value that is above the cost base up to the fair market value. The value elected would then become the cost base for the inheriting spouse, thus reducing their future capital gains.
