Principal Residence Designations on Relationship Breakdown
The breakdown of a marriage or common-law relationship will usually result in one of the spouses or common-law partners leaving the matrimonial home. What are the tax consequences of this? Will it result in a disposition and principal residence designation which needs to be reported on the Schedule 3?
The act of leaving the matrimonial home will not in itself result in a disposition of that spouse’s share of the property. This will only happen when a formal transfer of ownership occurs or the property is sold. If the property is sold, each spouse will make the designation on the Schedule 3 with respect to his or her share. In the case of a transfer of title, the deemed proceeds of the transferor’s share will be the same as his or her ACB unless both spouses elect for it to transfer at FMV. Unless the election is made, the spouse who is transferring title would therefore have no capital gain. However, we would still recommend that the designation details be reported on the Schedule 3.
In addition, both spouses or common-law partners should be aware of the rules concerning how the property may be designated as a principal residence after one of them has moved out. These are summarized below. For the sake of simplicity, we will assume that it is the husband who moves out and the wife who remains in the home. Of course, the same rules would apply if it is the wife who moves out and the husband that remains in the home.
- The husband may continue to designate a property as his principal residence even though he is no longer living in it himself as long as it is occupied by his spouse, common-law partner, former spouse or common-law partner, or child. A former spouse, for this purpose, would include an ex-wife from whom he is now divorced. So the fact that he is no longer living in the house does not mean that he cannot designate the property as his principal residence for years after the break-down.
- Spouses or common-law partners cannot designate different properties as their principal residence until they have been living separate and apart throughout the year pursuant to a judicial separation or written separation agreement. This could be a problem if husband purchases and moves into a new home and years go by before there is a court order or written separation agreement in place. Assuming his spouse wants to designate the old home as her principal residence, he must do so as well, which will leave his new home exposed. For this reason, it is recommended that the agreement specifies how the principal residence exemption will be designated.
- In order to designate a property as your principal residence, you must own the property either in your name or jointly with another person. Any complications resulting from spouses or common- law partners occupying different properties will therefore cease once there is an official transfer of title or the property is sold.
An election to transfer title at FMV (which is made under paragraph 74.5(3)(b)) could be beneficial where the couple have more than one property which can be designated as a principal residence (since it would reduce the capital gain realized by the transferee spouse in the year the property is sold). Remember, however, that the election must be made jointly. It is filed with the tax return of the transferor spouse in any year ending after the separation has occurred.