In 1991, the spouses jointly purchased an immovable ("Immovable1" located in Canada which was intended to serve as their principal residence upon their return to Canada. Their separation in 1992 did not constitute a judicial separation and was not effected pursuant to a written separation agreement. Upon their return to Canada, the wife bought a house in 1992 ("Immovable2") which immediately became her principal residence, but remained as a co-owner of Immovable1. The husband became a co-owner of Immovable2 in order to assist her in securing a mortgage, but did not make any monetary disbursements, nor live there. Immovable1 has been the husband's principal residence since May 1995;
Between the time of the purchase of Immovable1 and May 1995, Immovable1 was used to earn rental income. The wife has never lived in Immovable1.
Each of the spouses now wishes to sell his or her undivided share of the immovables to the other spouse for $1. CRA assumed that the wife will designate Immovable2 as her principal residence for the years 1995 to 2006 inclusive (as well as 1992, 1993, and 1994) and that, as a result, the husband must designate the same property for the years 1995 to 2006 – in which case, Immovable1 would be treated as a capital property subject to the change-in-use rules.
CRA indicated that the transfer of the husband’s interest in Immovable2 to your wife will be at the adjusted cost base of the interest and that, under s. 40(4), that interest will be deemed to have been owned by the wife for the entire period during which it was owned by the husband (1992 to the present). Thus, when the wife disposes of Immovable2, she will be able to benefit from the principal residence exemption for all the years during which Immovable2 was her principal residence in order to minimize or even eliminate any taxable capital gain