There are several tax considerations to examine when transferring property from one spouse to another after a separation or divorce. Partners may not spend much time dealing with the tax considerations since it is assumed a property will qualify as a principal residence and there will be no tax consequences arising from the transfer. It may come as a surprise this is not always the case.

Consider the following example.

John and Jane Doe owned their Toronto home together since 2010. The purchase price was $600,000.

In January 2023, the couple separated. John stayed in the home while Jane moved to Calgary to be closer to her family. The property was worth $1,500,000 at the time of separation.

The couple plans to transfer the home to John’s sole name while settling the couple’s property rights, and John plans to transfer assets or cash of $750,000 to Jane. The tax implications of a transfer of property other than real property have been discussed in a separate article, where it is assumed a taxable capital gain may result. However, where the property is personal‑use real estate, the couple’s expectation may be a tax‑free transfer. Any unanticipated tax consequences will affect the amount John should pay Jane in the division of property.

In advising the couple concerning the division of property, it is important to know the couple’s history of ownership of any real estate that may have been used as a home.

• Did John or Jane own a second home at any time between 2010 and 2023 (14 full or part years)? This may include a cottage or other home used seasonally.
• Was the property sold or is it still owned?
• If sold, was the disposition reported on the tax return in the year of sale?
• If the property was sold after 2016, was a Form T2091 filed to designate any part of the ownership of the second property as a principal residence?
• Has Jane purchased a new home in Calgary?

The answer to these questions may affect whether the transfer of the property to John will be eligible for the principal residence exemption. We will assume Jane and John only owned one property. To qualify for the principal residence exemption on the transfer of Jane’s 50% interest of the home to John, the following steps need to be taken:

• Jane and John must jointly elect to transfer Jane’s 50% of the property at its fair market value of $750,000 (50%). Without the election, the property will be transferred at $300,000 (50% of the cost), and no gain will result (see previous article for a more in‑depth analysis). Although a transfer without the election (i.e., at cost) does not trigger any immediate tax, it also does not increase John’s cost for the purpose of any future capital gain and may affect the amount of eligible principal residence claim.
• In addition to the election to transfer the property at fair market value, Jane must designate the property as her principal residence for each year of eligible ownership by filing Form T2091 and reporting the capital gain on her return of the year of transfer. Jane may designate only 13 years, as the formula provides a “plus one” year to take into consideration that more than one property may be owned in the year of purchase or sale. Jane will be disqualified from the principal residence exemption claim if she fails to report the sale on her return.
• Jane must not have designated any other property as her principal residence for the same years. This should be included as a condition of the transfer of property.
• John must not designate any other property as his principal residence for the same years. This should be included as a condition of the transfer of property.

What if John and Jane owned a cottage from 2015 and the property is still owned by both of them (nine full or part years of ownership)? The cottage’s cost was $300,000, and its value is $1,000,000. John and Jane plan to put the cottage on the market and sell it as soon as possible.

The potential gain per year of ownership of the Toronto home ($900,000 total gain/14 years of ownership = $64K per year) is lower than the potential gain per year of ownership of the cottage ($700,000/9 years of ownership = $78K per year). It is more advantageous for John and Jane to designate the cottage as their principal residence for 2016‑23, (i.e., 8 plus one equals 9 years) and the Toronto home for 2010‑15 (6 plus one equals 7 years). The steps outlined previously should be amended to take this into consideration.

Professional assistance is required to appropriately sort out the tax implications of the principal residence designation. Talk to a Segal GCSE advisor for more information.

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