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Do the taxes kick in when Mary moved out in 1994 or when her spouse died in 2013?
Q: I am in a unique situation. I separated from my husband in late 1994. We never divorced and we remained as joint tenants of a house and 1 acre that continued to be his principal residence until his death in late 2013. At that time, because of right of survivorship, his portion was transferred to me. My question is, when I sell the property, when does capital gains liability start for me? Is it from late 1994 when I moved out and it ceased to be my principal residence, or late 2013 when my spouse died and his portion was transferred to me?
— Mary
A: This is a unique situation indeed, Mary. More often than not, ex-spouses aren’t that inclined to leave inheritances to their former partners. That said, this may be a case of inaction leading to the inheritance, as the house is being made over to you as a joint tenant of the property. It may be that your ex never bothered to change the property into his own name after you separated.
I’m going to assume that your ex “got the house” so to speak as part of your separation, along with whatever debt may have gone along with it at that time. If there was a mortgage or line of credit on the property, it, too, would have been joint, like the property. So this would have impacted your credit rating all along and would have been your responsibility if he hadn’t paid it.
In this case, the home may have been legally owned by both of you after separating, but the property, from that point forward, may have been beneficially owned by him. In other words, the property may have been technically his for tax purposes despite the fact that your name was on title, Mary. He presumably maintained the property, paid the taxes and insurance and so on – meaning the property may have been technically no longer yours and that was your mutual understanding.
The problem is, if you never obtained a judicial separation or prepared a written separation agreement, your separation was never official in the eyes of the Canada Revenue Agency (CRA). This would mean that even though you were technically separated, you were still married in the eyes of the CRA for purposes of the tax-free principal residence exemption that can only apply to one property for a family unit for any given year.
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For our purposes, I’ll assume that the property was the only one that you and your husband owned prior to your separation in 1994, Mary. This would mean that neither you nor your husband would have any taxable capital gain for the period prior to 1994. Upon separation, if your separation was officially documented, the property would remain your ex’s principal residence from 1994 until his death in 2013. Any potential capital gains tax liability would start in 2013 when you inherited it, assuming you own a home and have two properties currently.
If your separation was not official, you and your ex can only claim one principal residence between you during the years that you were married and up until 2013. So if you owned a property of your own any time between 1994 and 2013, you can only claim one of those two properties as your principal residence. You would therefore need to consider the capital gain and potential tax on the two properties – which could be as high as 23% in British Columbia, Mary. It may make sense to elect for one or the other to be treated as your principal residence between you and your ex to generate the smallest tax liability.
Your ex would have been deemed to have sold the property on his death, but if your separation was not official, it can be transferred to you at cost with no resulting capital gain. The potential capital gain would therefore be triggered when you sell the property, unless you designate that property as your principal residence for all years that you owned it. This would mean any property you owned after 1994 on your own would have a capital gains tax liability in the future.
It’s unfortunate to have a tax liability to deal with in this case, Mary. But I’d say you’re fortunate to have received a windfall that most people wouldn’t normally get from their ex-spouse.
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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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