A person bought a property with a mortgage and later transferred 50% of the property to their spouse. They are trying to understand how the spousal rollover rule and attribution rules apply, particularly with respect to mortgage payments. Please ignore the principal residence exemption in this case.
Here are the key details:
The person originally purchased the property with a mortgage.
They later transferred 50% ownership of the property to their spouse through a deed of transfer, stating that the transfer was for $0 (no consideration), making them equal co-owners.
After the transfer, the spouse (transferee) began contributing to the mortgage payments.
The questions are:
Does the spousal rollover rule automatically apply since the transfer was for $0 (i.e., a gift)?
If the spouse contributes to the mortgage after the transfer, could this be considered a consideration for their share of the property, and would that affect the rollover?
When they eventually sell the property, how would the attribution rules apply? Specifically, if the spouse is helping with the mortgage, would capital gains from the spouse’s 50% share be taxed to them or attributed back to the original owner (the transferor)?
The spousal gift is deemed to have occurred at the transferor’s cost. The transfer would not be a “gift” if the recipient spouse was obligated to assume half the mortgage and the rollover provisions wouldn’t apply. To qualify for the rollover provisions, the gift must be a voluntary transfer with no expectation of proceeds/payment.
The fact that the spouse starts contributing to the mortgage payments shouldn’t affect the spousal rollover unless, as noted above, the recipient spouse was obligated to do so as part of the “gift”.
The attribution rules for the eventual sale would not take into account the recipient spouse’s contribution to the mortgage payments. This could be a Family Law issue but not a tax issue.
“spousal rollover” applies when one spouse dies - as long as the will does not specify otherwise, the deceased spouse’s share of the principal residence transfers to the living spouse, unless the living spouse opts out of the automatic rollover provision.
For tax purposes, it doesn’t matter whether or not the living spouse was on title or named in the mortgage agreement. If it was done prior to the death (as you describe), that makes it easier for the banking and legal transfers, but has no tax effect either way (assuming they were legally married or that “common-law” status is provable).
If this is a rental property or commercial real-estate or anything other than a principal residence, the taxable gain or loss on sale would be attributed to the co-owners in proportion to their investment in the property - which could include time or money contributed by the spouse who was NOT on title (i.e. contributed part of the down-payment, collected rent, did maintenance or bookkeeping, etc).
However, given that they are spouses, if they report the sale on their taxes as 50% ownership (regardless of their actual contributions), the probability of CRA questioning it is low (at least, based on my experience, not taking into account the increased property information that CRA may have started to gather/access in the last year or two, per the UHT and related government mandates).
The transfer was made to add the spouse to the title, and the deed itself doesn’t create an obligation for the spouse to pay the mortgage installments. It only mentions the spouse’s responsibility to pay their share of future property taxes, which are payable to the municipality.
The spouse is not obligated to participate in the payment of the mortgage as part of the gift or deed of transfer. Instead, they contributed to the mortgage payments as part of the joint responsibility for the mortgage since both spouses signed the deed of collateral with the bank at the time of the transfer.
Given this, does it mean that the rollover rules would still apply?
I believe if I understand correctly what Kevin is saying, since it is a principal residence and they are spouses, there are no tax consequences at all. With this I would agree.
The attribution issue would still apply but would likely be a moot issue since the principal residence designation would most likely result in a no tax situation. We can’t assume family law governs income tax law.