Principal Issues: Husband (H) and Wife (W) jointly own a house and a vacation cottage. As part of their divorce settlement H will transfer his 50% interest in the house to W, and W will transfer her 50% interest in the cottage to H. First, will these transfers be carried out on a tax-deferred basis under subsection 73(1)? Second, provided the ex-spouses jointly elect under 74.5(3)(b), will future gains or losses on the properties accrue to the recipients as opposed to the transferors? Finally, upon eventual sale of the properties, will H and W be entitled to the full principal residence exemption?
Position: 1) Yes; 2) Yes; 3) Yes with respect to the house, no regarding the cottage.
Reasons: 1) Unless H&W elect not to have subsection 73(1) apply, the provision would apply automatically, permitting a tax-deferred transfer of the properties described above. 2) Paragraph 74.5(3)(b) would apply, such that any future gains or losses on the properties will not be attributed to the transferor. 3) With respect to the house, the principal residence exemption should be available for all years pre-separation and for years post-separation subject to the property being designated by W. Regarding the cottage, the principal residence exemption would only be available for those years post-separation.
