11 August 2011 External T.I. 2010-0376171E5 - Spousal Trust

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.

Principal Issues: 1. Whether the spouse is entitled to receive all income of the trust that arises before her death where she has the discretion not to receive the income in a particular year. 2. Whether income of the spousal trust is payable to the spouse where the spouse directs that the income from the trust for a particular year not be paid to her but retained by the trust to be paid at a later date.

Position: 1. Yes 2. Yes

Reasons: Entitled to receive all of the income of the trust means to have a legal right to enforce payment of that income. As the spouse is entitled to enforce payment of the income earned by the trust for a year that income is payable to the spouse and included in the spouse's income even if the trust retains that income until a subsequent year.

XXXXXXXXXX
									2010-037617
									Julie White												905 721 5202
August 11, 2011

Dear XXXXXXXXXX ,

I am writing in response to your facsimile dated July 26, 2010 in which you requested a technical interpretation in respect of paragraph 73(1.01)(c) of the Income Tax Act (Canada) (the Act).

Your facsimile provides a scenario in which a husband creates an inter vivos spousal trust, that is described in paragraph 104(4)(a) of the Act, for his wife. The indenture to the spousal trust provides that the trustee is to pay to the benefit of the wife, out of the income of the trust, such amounts as may be directed by the wife. To the extent that the wife does not request the trustees to distribute all income realized in a specific taxation year, that income will be accumulated within the trust but the wife will be able to demand payment of the accumulated income at any time prior to her death.

You have raised two issues with respect to your scenario. The first issue is whether the wife is entitled to receive all income of the trust that arises before her death, the second issue is whether an amount is payable to the wife even if she has not, prior to the end of the year in which the trust realized the income, directed the trustee to pay the amount to her.

Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. For more information concerning an advance income tax ruling, please refer to Information Circular 70-6R5 dated May 17, 2002. Where a situation involves a specific taxpayer and a completed transaction, the inquiry should be addressed to the relevant Tax Services Office, together with all relevant facts and documentation. In addition, it should be noted that the tax consequences applicable to a trust cannot be determined without a complete review of all the relevant facts, including the trust indenture that created the trust. However, we are prepared to offer the following general comments, which may be of assistance.

Our Comments

For a trust described in sub-paragraph 73(1.01)(c)(i) of the Act, herein referred to as a spousal trust, the following conditions must be met:

• The trust must be created by an individual under which the individual's spouse or common-law partner is entitled to receive all of the income of the trust that arises before the spouse's or common-law partner's death, and
• No person other than the spouse or common-law partner may, before the spouse or common-law partner's death receive or otherwise obtain the use of any of the income or capital of the trust.

Where a trust meets these conditions, and pursuant to subsection 73(1) both the trust and the individual are resident in Canada at that time, the individual that creates the trust can transfer capital property to the trust on a tax deferred basis.

Subsection 104(13) of the Act generally provides that a beneficiary of a trust must include in their income for a particular taxation year, the income that became payable to the beneficiary in the trust's taxation year that ended in the particular year of the beneficiary.

Subsection 104(24) of the Act provides that for the purpose of subsection 104(13) an amount is deemed not to have become payable to a beneficiary in a taxation year unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of it.

In respect of your first issue on whether the wife is entitled to receive all the income of the trust prior to her death, it is our view that the phrase "entitled to receive all of the income of the trust" in subparagraph 73(1.01)(c)(i) means to have a legal right to enforce payment of that income. In order for a spouse to have a legal right to enforce payment of the income of the trust, any discretion in respect of the distribution of all or part of the income of the trust must be solely in the hands of the spouse. If the wife chooses not to receive the income of the trust for a particular year, she is still entitled to the income as she has the legal right to enforce payment of that income as it is her sole discretion whether or not she receives the income. The fact that such income is retained by the trust will not, by itself, disqualify the trust as a spousal trust. However, we would have to review the specific terms of a trust before being able to comment on a specific arrangement.

Your second issue is whether an amount is payable to the wife even if she has not, prior to the end of the year in which the trust realized the income, directed the trustee to pay the amount to her. It is our view, that as the wife is entitled to enforce payment of the trust's income for a year even though, at the discretion of the wife, the trust retains that income until a subsequent year, the trust income for that particular year is still payable to the wife within the meaning of subsection 104(24). Consequently, such income would be included in computing the income of the wife pursuant to subsection 104(13) for that particular year regardless of whether or not the income was paid to the wife, unless the trust made an election under subsection 104(13.1) for the year in question. As noted above, however, we cannot comment as to whether an amount under a specific arrangement would be considered payable without reviewing the trust indenture.

We trust the above comments will be of assistance to you.

Roger Filion CA
For Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch