CRA indicates that discretion of a spousal trust’s trustees to encroach on capital in favour of the spouse likely offends s. 256(7)(i)(ii)

S. 256(7)(i) deems a change in the trustees of a trust that controls a corporation to not entail an acquisition of control of the corporation. One of the two conditions for its application is in s. 256(7)(i)(ii), which required that at any time after the replacement of the trustee, no amount of income or capital to be distributed in respect of an interest in the trust depends upon the exercise, or the failure to exercise, by any person or partnership of a discretionary power.

Although it used buffering words, CRA appeared to consider that the discretion accorded to the trustees of a spousal trust to encroach on capital in favour of the spouse would violate this condition.

Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.9 under s. 256(7)(i)(ii).