Finance releases pre-comfort letter on largely overriding s. 104(13.4)(b) and permitting limited backdating of post-mortem donations

The new s.104(13.4)(b) rule dealing with spousal trusts (and similar trusts such as alter ego trusts) deems the trust’s income for the year ending with the lifetime beneficiary’s death (including from deemed proceeds at death) to have been distributed to the lifetime beneficiary rather than to be retained as trust income. This can result in the associated income tax liability being borne by the wrong beneficiaries, and in the stranding of donation credits for post-mortem donations made by the trust (which no longer has any income to use the credits).

In response to these concerns, Finance has indicated that it is generally amenable to providing that s. 104(13.4)(b) no longer applies except, in limited circumstances, where the spousal (or other) trust, and the lifetime beneficiary’s estate, jointly elect into s. 104(13.4)(b) applying. To deal with the donation credit "stranding" issue, Finance is amenable to allowing the trust to backdate donations made by it in the calendar year of the death to the trust taxation year that was deemed by s. 104(13.4)(a) to end with the death.

However, Finance will think about "whether additional amendments may be necessary to give effect to the…policy objectives" of avoiding "unintended tax benefits."

Neal Armstrong. Summary of 16 November 2015 Letter of Brian Ernewein to Joint Committee, CALU and STEP Canada respecting s. 104(13.4) under s. 104(13.4)(b).