What are the tax considerations when transferring property to a spouse?

In many circumstances, a person may wish to transfer some of their assets to their spouse during their lifetime.  Such transfers are typical amongst spouses, but before the asset is transferred, the parties should first consider the tax implications of making such a transfer.

For income tax purposes, it is generally assumed that transfers amongst spouses happen on a tax-free rollover basis.  And it is true that, unlike transfers to other family members, the tax rules default to having transfers between spouses take place at cost.  But that is not the end of the story.

Take the example of Robin and Kelly who are married to each other.  Robin wants to transfer shares in the capital of ABC Inc. to Kelly.  Regardless of whether Kelly pays Robin for the shares, any income (eg. dividends) or gains (on the eventual sale of the shares) will be taxed in Robin’s hands – in tax parlance, the income and gains will be attributed to Robin.

To avoid the attribution of income back to Robin, two things will need to happen in connection with the transfer:  Kelly will need to pay Robin fair market value for the shares, AND Robin and Kelly will need to file an election with their income tax returns to elect out of the spousal rollover.  If this is done, Robin will realize a gain on the transfer of property to Kelly (equal to the difference between the proceeds and the cost of the shares), but any future income or gains will be taxable in Kelly’s hands.

Advance planning for any transfer of property amongst related persons is important to avoid unintended tax consequences.  If you have questions, please contact us and we will be happy to assist.

By LaBarge Weinstein’s Taxation, Tax Planning, and Tax Litigation team.

This information is correct as of the date of posted.