February 13, 2025
Tax and Estate Planning for Your Two Spouses

In this article I wrote about the importance of correctly reporting marital status on personal tax returns. The Canada Revenue Agency (CRA) is keenly interested in marital status as certain benefits (including GST/HST credits, Canada child benefits, child-care deductions and eligible dependent claims) are calculated based on this status. However, marital status extends beyond the task of checking a box on a tax return; it can play a role in deeper tax and estate planning scenarios. Consider the following:
Kristy separated from her spouse, Ken, eight years ago. They were married for 10 years prior to their separation but are not yet divorced. The separation was amicable – in fact, the two remain good friends and co-parent their 15 year old daughter, Nicole.
For the past five years, Kristy has been living in a common-law relationship with her partner, Fred.
In thinking about estate planning, Kristy would like to understand her options for the transfer of her assets upon her death. She’s heard about tax-deferred transfers (i.e., rollovers) to spouses but would like to understand how this might apply to her given her separated status and common-law relationship. Specifically, Kristy would like to know the following:
- Are spousal rollovers available for both registered and non-registered assets?
- Who is her spouse for the purpose of applying these rules? Her separated spouse, Ken, or her common-law partner, Fred?
Kristy’s assets, all solely owned, are as follows:
Asset | Adjusted cost base (ACB) | Fair market value (FMV) | Unrealized capital gain | Proposed beneficiary | Notes |
---|---|---|---|---|---|
Principal residence | $300K | $700K | $400K | Fred | Wants to provide for Fred while living, with the asset passing to Nicole on Fred’s death |
Vacation property1 | $300K | $500k | $200k | Ken | Wants to provide for Ken while living, with the asset passing to Nicole on Ken’s death |
Non-registered mutual fund and bank account | $150K | $200K | $50K | Fred | To be transferred to Fred without restrictions |
RRSP | N/A2 | $400K | N/A | Undecided |
*For illustrative purposes only
Canadian tax rules state that where non-registered capital property (e.g., real property, stocks, bonds, mutual funds, etc.) is transferred to a Canadian-resident spouse or common-law partner at death (or to a Canadian trust for the benefit of a spouse or common-law partner), a tax-deferred rollover is possible deferring taxes to the future sale of the property or death of the spouse or partner, whichever occurs first1 . For registered assets, a tax-deferred rollover is available for RRSPs and RRIFs where Tax, Retirement & Estate Planning TAX AND ESTATE PLANNING FOR YOUR TWO SPOUSES3 To achieve the rollover, the property must vest in the spouse, common-law partner or trust within 36 months of the transferor’s death (or longer subject to written application to tax authorities). a spouse, common-law partner or financially dependant minor child or grandchild (or child or grandchild with a disability) is entitled to the RRSP or RRIF assets and they transfer the assets to an eligible registered plan for their benefit. For TFSAs, the value of the account at the time of the holder’s death is tax-free regardless of who the beneficiary is.
This leads to the next question – who is a spouse or common-law partner for the purpose of these rules? For tax purposes, the term “spouse” refers to a person to whom you are legally married. A “common-law partner” refers to a person to whom you are not married but are living with in a conjugal relationship that has lasted for a period of at least one year (or that person is a parent of your child).
It is interesting to note, as confirmed by CRA technical interpretation 2014-0523091C6, that it is possible to have both a spouse and common-law partner at the same time. For example, where an individual was legally separated but not divorced and had a common-law partner at death, a tax-deferred rollover of non-registered capital properties to both the separated spouse and common-law partner would be possible. Similarly, for RRSPs and RRIFs, technical interpretation 2006-0189141E5 confirms that tax-deferred transfers to RRSPs, RRIFs and annuities for both separated and common-law partners are permitted where rollover rules are met.
Applying these concepts to Kristy’s situation, assuming she predeceases both Ken and Fred and current rules apply at the time of her death, she would be considered to have two spouses – a separated spouse and a common-law partner – for the purpose of the rollover rules. To reduce taxes for her year of death, Kristy’s principal residence can be transferred to Fred directly, or, as per her specific testamentary wishes for the property, to a spousal trust for his benefit, without taxation. Thereafter, on transfer of the property to Nicole on Fred’s death, tax would likely be avoided through the principal residence exemption. Kristy’s nonregistered mutual fund account can also be transferred to Fred on a tax-deferred basis along with her bank account. Given that these assets are non-registered and solely owned, estate administration fees (i.e., probate) might apply where applicable.
Similarly, the tax rules allow for Kristy’s vacation property to be transferred to Ken either directly or to a spousal trust for his benefit without taxation. Tax would be deferred until a future sale of the property, or on Ken’s death upon transfer of the property to Nicole.
Kristy is undecided about who she wants to receive her RRSP upon her death; she can take comfort in knowing that both Ken and Fred would be eligible to receive the proceeds on a tax-deferred basis provided they transfer the assets to their own RRSP, RRIF, pooled registered pension plan (PRPP) or annuity. Alternatively, she can leave the RRSP to her minor child, Nicole, although, the rollover would not be available past age 18 unless Nicole has a disability.
When thinking about these rules, keep the following in mind:
- With some exceptions (for example, transfers while living), divorced spouses are generally not treated the same as separated spouses for tax purposes. Post-death rollovers to divorced spouses are generally not permitted;
- Tax-deferred transfers might not always make the most sense, especially where the deceased can make use of unused capital losses or low tax brackets for the year of death. See here for discussion. Taxpayers can normally trigger taxes for the year of death where it makes sense to do so.
Canadian tax rules offer some flexibility when it comes to managing assets and intimate relationships. While the “two spouse” concept might spark debate in social circles, it is a confirmed possibility from a Canadian tax perspective.
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1Canadian property
2Not relevant for this discussion
3To achieve the rollover, the property must vest in the spouse, common-law partner or trust within 36 months of the transferor’s death (or longer subject to written application to tax authorities).
About the Author
Throughout his career, Wilmot has held progressive positions in the areas of tax and estate planning, financial planning, banking, and securities analysis. He has completed numerous courses related to taxation, securities and mutual fund investing, insurance and estate planning. Wilmot received his Bachelor of Arts Degree (with Honours) in Mathematics for Commerce from York University. He also holds the Certified Financial Planner (CFP), Trust and Estate Practitioner (TEP), Chartered Life Underwriter (CLU) and Certified Health Insurance Specialist (CHS) designations. Since 2001, Wilmot has spent his time guiding financial advisors on tax and estate planning matters through presentations, one-on-one consulting and written communication.He has been featured in various financial forums including The Globe and Mail, The National Post, Advisor.ca, and Investment Executive. Additionally, Wilmot has delivered presentations for The Financial Advisors Association of Canada (Advocis), the Society of Trust and Estate Practitioners (STEP) and The Institute of Advanced Financial Planners (IAFP). Away from work, Wilmot enjoys various sports, traveling and spending time with family and friends.
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