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 lived 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.
The transfer by the wife of her interest in Immovable1 to the husband would occur under s. 73(1) at the ACB of her interest (assuming no election under s. 73(1)) and that provided the election under s. 74.5(3) was made jointly by the spouses, there would be no attribution of the capital gain realized on a subsequent sale of Immovable1. Furthermore, these results would not change if the transactions arose from a separation or divorce judgment relating to the division of spousal property.