How Couples Can Reduce Capital Gains Tax on Canadian Property

Reasons spouses sometimes hold property in one name only

Most married couples hold real estate jointly, but there are common reasons a property might remain in only one spouse’s name:

• One spouse owned the home before the marriage and left title in their name only.
• A spouse who runs a business with exposure to creditors may keep property titled in the other spouse’s name for protection.
• In second marriages, couples may hold property as tenants in common so individual shares pass to children from prior relationships.

It’s not clear why your husband kept the rental in his name, Iuliana, but several tax and estate considerations apply and are worth reviewing.

Converting a principal residence into a rental

When a home changes use from a principal residence to a rental, tax rules treat that change as a deemed sale and immediate reacquisition at fair market value. That deemed disposition can create a capital gain or loss for the year the use changes and establishes the adjusted cost base for future capital gains.

If the property qualified as your principal residence for all prior years, you would likely have no tax payable for those years. You may also have had the option at the time of conversion to file a subsection 45(2) election with the Canada Revenue Agency to keep designating the property as your principal residence for up to four additional years—possibly filed retroactively in some circumstances. That election prevents designating another property as your principal residence for those years and forbids claiming capital cost allowance (depreciation) on the rental income for the same period.

There are limited situations where the four-year period can be extended indefinitely, such as when you live away from the principal residence because your or your spouse’s employer requires relocation.

Capital gains on the first spouse’s death

Transfers between spouses are generally tax-deferred. If a spouse transfers assets to the other while alive, they usually transfer at the original adjusted cost base, and subsequent income can be attributed back to the transferring spouse.

When a spouse dies and leaves assets to the surviving spouse, the same rollover at cost typically applies, meaning no capital gain is triggered on the first death. However, income earned after the transfer is taxable to the inheriting spouse and any deferred capital gains are realized when that spouse later sells the asset or is deemed to dispose of it on death.

An executor can elect to trigger capital gains on the deceased’s return for some or all of the deferred gain. This election might make sense if the deceased had low income that year or available losses, credits, or deductions that would offset the tax. Electing a partial or full deemed disposition at a value above the cost base up to fair market value sets a higher cost base for the inheriting spouse and reduces their future capital gains.

Legal ownership versus beneficial ownership

It’s important to distinguish legal title from beneficial ownership:

• Legal ownership is the name or names on the property title. If the property is legally registered in your husband’s name, he is the legal owner.
• Beneficial ownership reflects who actually owns the economic value of the property for tax or equitable purposes.

If both of you contributed equally to the purchase and mortgage payments while it was your principal residence, the property might be considered jointly beneficially owned even if legal title is only in his name. On the other hand, if rental income and tax filings have always been in your husband’s name since the conversion, that supports a position that he is both the legal and beneficial owner.

Family law treatment of marital assets can differ from tax and property law, and provincial rules vary. An asset may be legally and beneficially owned by one spouse yet still be subject to division in divorce proceedings under provincial family property rules.

Probate when the first spouse dies

Probate is the court process that validates a will so an executor can transfer assets to beneficiaries. For real estate, probate is often required to allow legal title to be transferred. Provinces and territories charge probate fees or taxes that vary widely—ranging from modest flat fees in some places to a percentage of the estate value in others.

If the property is only in your husband’s name, probate fees may apply to transfer it to you on his death. One common way to avoid probate is to hold title jointly as joint tenants with right of survivorship, allowing the property to pass directly to the surviving owner without probate. That would require adding your name to title now.

Adding you to title changes legal ownership but does not automatically change beneficial ownership for tax reporting; your husband could still report the income on his tax return if appropriate, while the legal title change helps avoid probate.

Capital gains and probate on the second death

Many people mix up joint ownership with a spouse and joint ownership with another person, such as a child. Only transfers between spouses generally receive the tax-deferred rollover. Joint ownership with a child does not avoid capital gains tax on a deemed disposition—the deferred gain will be recognized on the final tax return when the surviving spouse dies.

Joint ownership with a child to avoid probate has legal and tax risks and may not reliably prevent probate in every jurisdiction. Before considering such arrangements, discuss the implications with an estate lawyer: saving probate fees may not be worth exposing valuable assets to unintended claims or complications.

Summary

In short, Iuliana, your husband can add you to the rental property now without triggering immediate tax consequences in most cases. If he does not add you and leaves the property to you in his will, the transfer to you on his death is generally tax-deferred for capital gains purposes. However, if title remains only in his name, probate fees may apply when transferring the property to you. If avoiding probate matters to you, consider legally adding your name to title or speaking with an estate lawyer to confirm the best approach given your province’s rules and your overall estate plan.

Read more about estate planning:

• How to avoid probate fees in Canada
• Can transferring ownership of a house help avoid probate tax?
• Is transferring your principal residence to your corporation a good idea?
• Capital gains when selling property to family
• Capital gains, taxes and more: The implications of inheriting real estate