Under the Income Tax Act (Canada) when a taxpayer dies they are deemed to dispose of all capital property that they own. The result is a realization of all accrued capital gains and an income tax liability in respect of those gains. A deferral of this liability exists if the taxpayer leaves their capital property to their spouse or common-law partner to a trust for the benefit of their spouse if the trust meets certain stipulated terms. The question I recently had to address was who constitutes a “spouse” and more accurately can you have two.
The context involved a deceased client who was still legally married to his wife but was also living in a common law relationship at the time of his death. As a result the client effectively had two spouses. While this may seem odd, it is not. Often married couples who separate don’t go through the formal process of divorcing unless they need to. Unless one of them wants to remarry, the need never arises.
As part of his estate plan the client left his RRSP to his wife and the balance of his estate to his common law spouse. The issue I had to address was could he benefit from the rollover for tax purposes in respect of the property that went to his married spouse and the property that went to his common law partner?
The Income Tax Act (Canada) does not define the term “spouse”. Notwithstanding it is understood to mean a person to whom one is legally married. The term “common-law partner” is defined to be a person with whom one cohabits in a conjugal relationship and has so cohabited for a period of at least one year or is the parent of a child of that person. As a result of these interpretations it is possible for a tax payer to have both a married spouse and a common-law partner.
Canada Revenue Agency has confirmed that this is possible. This is because the deemed disposition rule applies on a property-by-property basis. As a result, so long as a particular property is left to an individual who qualifies for the rollover, the tax liability will be deferred and it does not matter if different individuals meet the test in respect of different properties.
So if you are in the situation where you may have two spouses, while this may cost you more for other reasons, at least on the income tax side your estate plan may benefit.