Oct 03, 2016
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“Spousal transfers can result in transfer of cost base..”
There are a number of rules to ensure that a loss cannot be created on transfers between spouses. These stop-loss rules apply to transfers between spouses, as well as transfers to a spouse’s corporation, trust or partnership. There are, however, situations where the stop-loss rules can be used advantageously.
If a husband realized capital gains in the year, and his wife owns investments that have accrued capital losses, tax planning may permit the husband to use her capital losses. Normally, any transaction between spouses occurs at cost unless an election is made under subsection 73(1) that the transaction should take place at fair market value.
In the example above, if the wife were to elect to transfer her investments to her husband at fair market value, there would be a capital loss to the wife. This loss, however, would be denied. It would be added to the cost base of the husband’s investment. The net result would be that the husband would now have an investment with a high cost base and a low fair market value. When the husband sells the shares, he would realize a capital loss that could be used to offset capital gains that he had realized during the year.
One cautionary note: the CRA may attempt to apply the General Anti-Avoidance Rules on this transaction.
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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.