Two for One: Bequests to Both the Spouse and the New Partner

It’s said that about 40% of Canadian marriages will end in divorce. So does that mean the other 60% remain happily attached until death? Probably not. It is not uncommon for people to separate and choose never to get divorced. In some cases, it’s because divorce is too costly. For others, the spouses may decide or be required to live in separate living accommodations (e.g., illness or age). In any case, that leaves a portion of married people who enter the dating scene with “it’s complicated” statuses. This article looks at the tax-deferred rollovers for when one of those people die and leave bequests to both their spouse and a new common-law partner.

A spouse, while not defined, is generally considered the person that the taxpayer is married to, whether they are separated or not. A common-law partner is the person with whom the taxpayer has been cohabiting with for at least 12 months while in a conjugal relationship.[1] With those definitions, it is possible for a taxpayer to have both a spouse and a common-law partner at the same time.

When a taxpayer dies, all of their capital property is deemed to be disposed at fair market value.[2] This can lead to a hefty tax bill owed by the Estate for all of the accrued capital gains. However, there is relief available when property is left to the deceased taxpayer’s spouse, common-law partner, or a spousal trust for the benefit of either.[3] Subsection 70(6) will deem the capital property to be transferred at cost instead, meaning no capital gains are recognized. In order to qualify, the taxpayer must have been a Canadian resident immediately before death, the property must have been transferred as a consequence of death, and the property must vest indefeasibly to the spouse or common-law partner within 36 months of the death. On at least two occasions, the CRA has made it clear that, so long as the transfer meets the criteria, the rollover provision will apply to bequests to both a spouse and a common-law partner of the deceased taxpayer.[4]

With all that said, this only addresses one (tax) facet when considering a whole estate plan. Under estate law, a separated spouse will be deemed to be predeceased in a Will[5] and spouses or adult interdependent partners[6] may claim support and maintenance from the Estate. This could lead to messy and costly litigation if the deceased did not ensure their intentions were clearly laid out and documented.

Our Wills & Estates team and Tax team can work cohesively to provide you with a wholistic estate plan. Please contact our office.

[1] Income Tax Act, subsection 248(1), definition of “common-law partner”.

[2] Income Tax Act, subsection 70(5).

[3] Income Tax Act, subsection 70(6).

[4] 2014-0523091C6 and 2010-0373901I7.

[5] Wills and Succession Act, subsection 63(1).

[6] “Common-law partner” is a tax term, defined in the Income Tax Act for tax purposes. “Adult interdependent partner” (AIP) is a family law term, defined in the Adult Interdependent Relationship Act (Alberta) and is used for estate law purposes. Generally, an AIP is a partner whom have an interdependent relationship with while either cohabiting for 3 years or have a child together.