Can I sell my business to my spouse?

A sale to a spouse or common-law partner is treated differently from a sale to other relatives. Section 73(1) of the Income Tax Act applies where capital property of an individual (other than a trust) is transferred to a spouse or common-law partner, or in the other circumstances listed in subsection 73(1.01), and both the individual and the transferee are resident in Canada at that time. The result is a rollover unless the seller elects otherwise in the return for the year of transfer. It covers capital property only, so ask your accountant what part of your business is.

The default: a rollover

The CRA says you generally do not have a capital gain or loss when you transfer capital property to your spouse or common-law partner, and the spouse is considered to have bought it for the amount you are considered to have sold it for. The tax is deferred, not removed. CRA says that if your spouse or common-law partner sells the property during your lifetime, you usually have to report any capital gain or loss from the sale if, at the time of the sale, you are resident in Canada and still married to or living common-law with that person.

Electing out and reporting the gain

The CRA says the transferor may elect, in the return for the year of transfer, not to have subsection 73(1) apply. If you were paid an amount equal to fair market value, CRA says you attach to your return a letter signed by you and your spouse or common-law partner stating that you are reporting the property as sold at that value and electing that 73(1) not apply. You then report any capital gain or loss for the year of sale, and CRA says that if your spouse later sells the property, your spouse reports any capital gain or loss from that sale.

Attribution of later income and gains

Subsection 74.1(1) deems income or loss from property transferred or lent to or for the benefit of a spouse or common-law partner (or from substituted property) to be the transferor’s, for the period in which the transferor is resident in Canada and they remain spouses or partners, subject to the exceptions in section 74.5. Subsection 74.5(1) says subsections 74.1(1) and (2) and section 74.2 do not apply to income, gain or loss from transferred property if the property’s fair market value did not exceed the fair market value of the consideration; if that consideration included debt, interest was charged at no less than the lesser of the prescribed rate and an arm’s length rate and was paid no later than 30 days after the end of each year; and, for a spouse or common-law partner, the transferor elected out of 73(1). The CRA describes a separate election where spouses live apart because of a relationship breakdown. Provincial family-law property rules are not covered here. For a broader view, see selling a business to a family member.