In my last blog, Who Knew There is a Benefit to Having Two Spouses, I spoke of the ability to benefit from a rollover for income tax purposes in respect of property that passes to two different individuals, each of whom qualifies as the spouse or common-law partner of the deceased taxpayer. Subsequent to that blog I received several responses from readers providing me with additional food for thought on this topic.
Spouse is not defined in the Income Tax Act but is taken to mean married. Common-law partner is defined in ss. 248(1) of the Income Tax Act. Unless otherwise specified, spouse entitlement remains, even if separated, as long as the spouses are not divorced. But for the common-law partner, being separated can be significant when it comes to rollovers.
One reader, a senior practitioner within a financial institution, noted for common law partners, being separated will result in the lack of any rollover in circumstances where a rollover might still have been available to a separated but not divorced spouse.
When spouses or common law partners are engaging in property transfers to settle their property rights as a result of relationship breakdown, in the event one of them dies before this is completed, the breakdown rollover will not be available. Specifically, Canada Revenue Agency has commented that the breakdown rollover is only available where the annuitant transferee and the spouse/partner transferor are living. See Technical Interpretations 2011-0418821E5.
However, a surviving married spouse can receive property under the death rollover, even if they were separated from their deceased spouse. For spouses, if the breakdown rollover was intended but not completed before death of one of the spouses, it might be possible to still utilize the death rollover. This is not the case for common law partners. Where two common law partners have separated, their relationship will have ended such that they no longer qualify as common law partners under the Income Tax Act when one of them dies. As a result, the death rollover is not available for a transfer of property to an individual who was a common law partner but was separated from the deceased taxpayer before death.
The upshot is that in the event of relationship breakdown among common law partners, it is important that property settlements occur quickly if the tax treatment of the rollover is an important component of the agreement. The unexpected death of one of spouses or partners before the transfer from one plan to the other occurs, means the financial institution cannot process a transfer of a registered plan to a surviving spouse or partner on a breakdown rollover basis. And for separated common-law partner survivors, the deceased’s estate cannot use the death rollover because the separated surviving partner does not qualify for it. So the surviving separated common-law partner can access neither the breakdown nor the death rollover.