“The decision whether to elect out of the spousal rollover can be made on a share-by-share basis.”
The Income Tax Act provides for an automatic rollover of capital property to a spouse for tax purposes when a taxpayer dies. The legal representative can elect out of the spousal rollover on a property-by-property basis.
One common reason to elect out of the spousal rollover is to utilize the deceased taxpayer’s capital gains exemption. Using the exemption in the year of death can increase the cost base of the shares to the surviving spouse.
The election out of the spousal rollover can be made on a share-by-share basis. For example, if a taxpayer dies owning 100 common shares of a qualifying small business corporation, the decision whether to elect out of the spousal rollover can be made on each share.
If the 100 shares have an overall accrued gain of $1 million, the taxpayer’s legal representative may decide to elect out of the spousal rollover on $750,000 (i.e., 75 shares) in order to use the capital gains exemption, which will increase the cost base of the shares to the surviving spouse.
If the election is made on 100 common shares, the deceased taxpayer’s estate will recognize a $1 million gain, of which only $750,000 will be sheltered by the capital gains exemption. The legal representative may therefore decide to elect out of the spousal rollover on only 75 of the 100 common shares owned by the taxpayer. The capital gain realized by the deceased taxpayer will therefore be $750,000. It will be sheltered by the capital gains exemption. The result is a $750,000 increase in the cost base of the shares to the surviving spouse, with no pre-payment of tax on the $250,000 balance.
If the taxpayer had only owned 1 common share, this plan would not be available. In these cases, increasing the number of shares by a tax-free share exchange or a stock split may be advisable
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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
