Core Tax Concepts at Death and for Estates

Spousal/common-law partner rollover (ITA s.70(6)) — The “Love Is Patient, Taxes Are Deferred” Edition

You met s.70(5) already: the grim reaper of tax, deeming your stuff sold at fair market value the moment you exit stage left. Now meet s.70(6): the chill friend who shows up with snacks and says, “No panic — if it goes to your spouse, we’ll press pause on the tax bill.”

---

Why this matters (and how it fits with what you already know)

From our earlier dive into s.70(5), you know that death triggers a deemed disposition at FMV. That’s a capital gains confetti cannon plus potential recapture on depreciable property. But because Canada is not completely heartless, s.70(6) steps in to defer that tax when property passes to a surviving spouse or common-law partner, either directly or via a qualifying spousal/common-law partner trust.

Also remember: estate administration is mostly provincial territory, but income tax is federal. Translation: provincial will/probate mechanics determine who gets what, and the ITA’s federal definitions and conditions decide whether the rollover actually happens.

---

What s.70(6) Actually Does

• If property of the deceased passes to the spouse/CLP or to a qualifying spousal trust as a consequence of death, the deceased is deemed to dispose of that property at tax cost (think ACB or “cost amount,” not FMV), and the spouse/CLP (or the trust) acquires it at that same amount.
• Result: no capital gain, no recapture at death. Tax is deferred until the spouse/CLP or the trust later disposes of the property.

TL;DR: s.70(5) says “pay now,” s.70(6) says “pay later — if you meet the rules.”

---

The Conditions (aka “Do these or the tax gods say no”)

1. Qualifying recipient:

   • A spouse (legally married), or a common-law partner (cohabiting in a conjugal relationship for 12 months or with a child together).
   • Not living separate and apart due to relationship breakdown immediately before death. If they’ve split, the rollover usually dies too.

2. As a consequence of death:

   • Property must pass under the will, by intestacy, or by operation of law (e.g., joint tenancy survivorship). ITA s.248(8) helps here.

3. Vesting timeline:

   • The property (or trust interest) must vest indefeasibly in the spouse/CLP or qualifying trust within 36 months of death. CRA can allow more time if reasonable.
   • “Vest indefeasibly” = the spouse’s right isn’t conditional or defeasible by someone else’s whim. Conditions like “if my spouse survives me by 30 days” are fine once satisfied — just watch the clock.

4. If using a spousal/common-law partner trust:

   • The spouse/CLP must be entitled to all income of the trust during their lifetime; and
   • No one else can access income or capital before the spouse’s death.

---

Direct Transfer vs Spousal Trust: The Vibe Check

Feature	Direct to Spouse/CLP	Spousal/CLP Trust
Tax at death	Deferred under s.70(6)	Deferred under s.70(6)
Control/protection	Spouse owns property outright	Trustee controls per trust terms; protects against remarriage, creditors, or spendy habits
Future tax	Spouse taxed on future gains/recapture when they dispose	Trust faces deemed disposition on spouse’s death (s.104(4)) and/or 21-year rule is deferred until spouse’s death
Probate/administration	May avoid probate if joint/beneficiary designation	Involves trust setup, trustee duties, compliance
Family dynamics	Simple, but vulnerable to later changes (new will, new partners)	Can lock in benefit path for kids of prior relationship

---

The Opt-Out Drama: s.70(6.2)

Yes, you can deliberately choose to NOT rollover. Why would anyone do that? Strategy.

• The legal representative can elect out of the s.70(6) rollover on a property-by-property basis, causing s.70(5) FMV treatment.
• Why opt out?
  • Use the deceased’s losses or lower tax brackets.
  • Crystallize the lifetime capital gains exemption (LCGE) on QSBC shares or qualified farm/fishing property.
  • Reset ACB to FMV to reduce the survivor’s future tax.
• Practical note: Electing out is generally all-or-nothing for that specific property (you can’t pick a custom value between cost and FMV).

Pro move: In blended families, advisors often mix: roll some assets for deferral; elect out on others to use LCGE or losses. It’s a tax tasting menu.

---

Examples (because numbers make it real)

1. Capital property direct to spouse

• Facts: A cottage ACB $300,000; FMV $700,000.
• With s.70(6): Deceased deemed proceeds $300,000; spouse acquires at $300,000. No gain now. If spouse later sells at $750,000, gain is $450,000 then.
• Without s.70(6) (elect out): Deceased has $400,000 capital gain on final return; spouse acquires at $700,000 FMV ACB.

2. Depreciable property into spousal trust

• Facts: Rental building in a CCA class. Cost amount equals its tax cost; FMV is much higher.
• With s.70(6): No recapture or capital gain at death. Trust steps into tax cost. Recapture/gain arises when trust sells or at deemed disposition on spouse’s death.

3. Joint ownership rescue

• Facts: Home held in joint tenancy passes to surviving spouse by right of survivorship.
• Result: Still “as a consequence of death.” s.70(6) can apply to the deceased’s share, deferring tax (subject to principal residence rules later).

---

Common Pitfalls (aka How to accidentally nuke your rollover)

• Separation at death: If the couple was living separate and apart due to breakdown, no rollover. Don’t assume “still married” equals “still qualifies.”
• Bad trust drafting: If anyone other than the spouse can touch income or capital before the spouse dies, the trust fails the test. The phrase you want: “spouse entitled to all income during lifetime, and only spouse may access income/capital before death.”
• Missing the 36-month vesting: Delays from probate fights or will challenges can be fatal unless you secure CRA relief. Document the reasons and request extension.
• Provincial vs federal definitions: You might be a “spouse” under provincial succession law but not meet the ITA definition of common-law partner (or vice versa). Always check the federal definition for tax.
• Opting out without a plan: Crystallizing gains sounds sophisticated until you discover there are no losses to offset and you just torched cash flow for the estate.

---

Registered Plans, Residences, and Other Fun Add-ons

• RRSPs/RRIFs: Separate rules (e.g., s.146(8.1), s.146.3) allow a tax-deferred transfer to a spouse/CLP or qualifying spouse trust when properly designated. Don’t confuse these with s.70(6), but the spirit is the same: deferral if spouse receives.
• Principal residence: If the spouse or spousal trust later sells, the principal residence exemption might reduce taxes then. Rollover doesn’t grant the exemption; it just punts the tax moment downfield.
• Residency: The s.70(6) rollover is generally available even if the spouse is non-resident, though cross-border planning can add complications later (think withholding, treaty issues).

---

Policy Rationale (Why the ITA grows a heart here)

Think social policy: surviving spouses often need stability, not a surprise tax bill. The rollover keeps family assets intact, aligning with the broader fairness vibe of estate taxation while still ensuring tax shows up eventually.

“Deferral is not forgiveness. It’s a rain check.” — Literally Every Tax Professor

---

Quick Decision Path (pseudocode for your planning brain)

if property passes to spouse/CLP or qualifying spousal trust and vests within 36 months:
    apply s.70(6) rollover (no gain/recapture now)
    if strategic reason to trigger gains (losses available, LCGE, basis step-up desired):
        elect out under s.70(6.2) for that property
else:
    default to s.70(5) deemed disposition at FMV (tax now)

---

Ethics + Family Dynamics (the real final boss)

From our earlier talk on ethics and conflicts: a rollover can be great for the spouse but might delay or reduce what children (especially from prior relationships) eventually receive. If you’re the advisor, flag the potential conflict, document instructions, and draft trust terms that match the client’s actual goals (not just the quiet hopes of whichever family member called you first).

Also, capacity matters. If the will or trust terms don’t clearly create a qualifying spousal trust, you can’t paper it over after the fact. Precision up front saves decades of regret.

---

Key Takeaways

• s.70(6) is your main tool to defer tax at death when assets pass to a spouse/common-law partner or a qualifying spousal trust.
• The magic words: as a consequence of death, vests indefeasibly within 36 months, and for trusts: all income to spouse, no one else touches capital.
• You can elect out (s.70(6.2)) on specific assets to use losses, LCGE, or reset basis — but do it on purpose, not by vibes.
• Provincial law decides who gets what; federal tax law decides how (and when) it’s taxed. Don’t mix them up.
• Deferral ≠ escape. The bill comes due on the spouse’s sale or at the trust’s deemed disposition (often at the spouse’s death under s.104(4)).

If s.70(5) is the storm, s.70(6) is the umbrella. Hold it properly, and you’ll get everyone across the street mostly dry — with fewer tears and more math that actually makes sense.