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A US citizen and resident individual is considering gifting a half interest in his Ontario cottage to his US resident and citizen spouse. A lawyer told him that it may be treated as a rollover for Canadian tax purposes (i.e. no gain recognized), but he should check with an accountant. It looks to me like there is a rollover available for a transfer to spouse on death only...no rollover on a lifetime transfer. Let me know if this is correct (or not).

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Michael Atlas, CPA, CA
You are correct.
Under domestic law, the “spousal rollover” is only available in connection with transfers between Canadian residents.
The special rule in Article XXIX-B:5 of the Canada-US Tax Convention only allows the spousal rollover on death.
Thus, the transferor will be deemed to have disposed of the half interest for its fair market value, and will be subject to tax in Canada with respect to any resulting capital gain.
There would also be tax clearance issues under section 116 of the Income Tax Act-in the absence of a tax clearance from the Canada Revenue Agency, the transferee spouse would be on the hook for 25% of fair market value of the interest received.
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