Spousal Trust Change Is a Welcome Relief

The Department of Finance recently released proposals to amend certain sections of the Income Tax Act (the Act) that pertain to the tax treatment of certain trusts. The proposed changes restore fairness in matters relating to spousal trusts.

It was proposed that section 104(13.4)(b.1) be added to the relatively new section 104(13.4)(b). That section directs capital gains arising from the deemed disposition upon a surviving spouse’s death, to be taxed in the surviving spouse’s estate, not in the trust (which was the rule in effect prior to January 1, 2016).

Inequities, however, would occur where beneficiaries of a surviving spouse’s estate differed from the residuary beneficiaries of the trust established for the surviving spouse during his or her lifetime.

The proposed new rule would limit the application of section 104(13.4)(b) to circumstances involving a surviving spouse who:

a) immediately prior to his or her death, was resident in Canada; and
b) was a beneficiary of a post-1971 spousal or common-law testamentary trust, which was created by a will of a taxpayer who died before 2017.

Under those circumstances, the trustee of the surviving spouse’s estate could jointly elect with the trustee of the other spousal trust to have section 104(13.4)(b) apply, so that the capital gains arising from the death of the surviving spouse could be taxed in his or her estate and not in the other spousal trust.

This election would be beneficial in circumstances where there is a capital gain in a spousal trust and at the time the surviving spouse dies he or she had personal capital losses which otherwise could not be used.

Greer Jacks practices law in Victoria and contributes to the update of EverGreen Explanatory Notes and the Use of Trusts in Tax and Estate Planning course from Knowledge Bureau. 

Additional Educational Resources – Use of Trusts in Tax and Estate Planning and Final Returns on Death of a Taxpayer courses.

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