6 January 2000 External T.I. 9926255 - SPOUSAL TRUST ENTITLED TO RECEIVE ALL IN

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether a trust is a spousal trust if the trustee has discretion to hold back any portion of the trust income (other than income not included in the definition of income of the trust by reason of subsection 108(3)) from the spouse beneficiary.

Position: No

Reasons: "Entitled to receive" means having the ability to enforce payment. Discretion available to the trustee means that the spouse is not entitled to all of the income.

XXXXXXXXXX 992625
A. Humenuk
Attention: XXXXXXXXXX

January 6, 2000

Dear Sirs:

Re: Spousal Trusts

This is in reply to your letter of September 8, 1999, in which you ask whether a particular trust created under the terms of a will meets the conditions specified in subparagraph 70(6)(b)(i) of the Income Tax Act (the "Act") to qualify as a spousal trust.

The situation outlined in your letter appears to involve an actual transaction or transactions seriously contemplated by an identifiable taxpayer. As stated in paragraph 22 of Information Circular 70-6R3, Advance Income Tax Rulings, dated December 30, 1996, the Canada Customs and Revenue Agency does not issue opinions with respect to specific proposed transactions, and confirmation of the tax consequences of specific proposed transactions will only be provided in response to a request for an advance income tax ruling.

We are, however, able to offer the following general comments on your situation.

As stated in paragraph 5 of Interpretation Bulletin IT-305R4, Testamentary Spouse Trusts, a trust is not a spousal trust as described in subsection 70(6) of the Act unless, among other things, the spouse beneficiary is entitled to receive all of the income of the trust arising before his or her death. As stated in paragraph 13 of IT-305R4, income of the trust for this purpose is computed without reference to the provisions of the Act and excludes any of the dividends listed in subsection 108(3) of the Act that are included in the computation of trust income. As a result, a trust will not be precluded from qualifying as a spousal trust if, under the terms of the trust, capital dividends or capital gains dividends are not paid or payable to the spouse.

It is our view that the phrase "entitled to receive" all of the income of the trust means having a legal right to enforce payment of that income. For a spouse to have a legal right to enforce payment of all of the income of the trust, it is our opinion that discretion to receive all or part of the income of the trust must be solely in the hands of the spouse beneficiary. If the spouse beneficiary can legally enforce payment of all income of the trust but indicates in writing to the trustee(s) of the trust a desire not to receive some or all of such income, the fact that some income is retained by the trust and added to the capital of the trust will not, by itself, disqualify the trust as a spousal trust.

If, however, the trustee(s) of a trust may, under the terms of the trust agreement, restrict the payment to the spouse of any portion of the trust's income it is our view that the spouse is not "entitled to receive" all the income of the trust within the meaning of subparagraph 70(6)(b)(i) of the Act and the trust will not be a spousal trust.

As stated in paragraph 15 of IT-305R4, the doctrine of constructive receipt applies in determining whether a spouse is entitled to receive all of the income of the trust for a particular year. Consequently, a trust would not be disqualified as a spousal trust solely because a provision of the will provides for the payment of the income of the trust to a person other than the spouse on the condition that such income be used solely for the benefit of the spouse.

We trust our comments will be of assistance.

Yours truly,

T. Murphy
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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