3 May 2002 External T.I. 2002-0126775 - 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.

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

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

Principal Issues: Whether a trust qualifies as a spousal trust for the purposes of the Income Tax Act.

Position: General comments regarding subparagraphs 70(6)(b)(i) and (ii).

Reasons: No comments on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling.

XXXXXXXXXX 2002-012677
Éric Allard-Pouliot
May 3, 2002

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: Spousal Trusts

This is in reply to your letter of February 8, 2002, in which you requested our opinion regarding the above-noted subject. More particularly, you requested our opinion as to whether the wording of a trust contained in a specific will, of which a copy was enclosed with your request, would meet the requirements of subparagraphs 70(6)(b)(i) and (ii) of the Income Tax Act (the "Act") and qualify as a spousal trust.

The particular circumstances in your letter on which you have asked for our views refer to a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Therefore, while we cannot confirm the tax effects of the particular situation outlined in your letter, we are prepared, as discussed, to offer the following general comments which may be of assistance to you.

Pursuant to subparagraphs 70(6)(b)(i) and (ii) of the Act, in order for a trust to qualify as a spousal trust the terms of the trust must provide that: (i) "the taxpayer'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 (ii) "no person except the spouse or common-law partner may, before the spouse's or common-law partner's death, receive or otherwise obtain the use of any of the income or capital of the trust".

With respect to the first condition provided in subparagraph 70(6)(b)(i) of the Act, it is our view that the phrase "entitled to receive" all of the income of the trust means to have a legal right to enforce payment of that income. For a spouse to have a legal right to enforce payment 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 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 of 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. Therefore, a qualifying spousal trust cannot be discretionary with respect to the entitlement of the spouse, as beneficiary of the trust, to enforce payment of the income of the trust.

Such an interpretation was accepted by the Court in Executors of the Estate of the Late Wilbert Peardon v. M.N.R., 86 DTC 1045 (T.C.C.), where it was found that the provision that income and capital be paid to the spouse in the executor's absolute discretion did not meet the condition provided in subparagraph 70(6)(b)(i) of the Act. In this case, the Court accepted that the word "entitled" in subparagraph 70(6)(b)(i) of the Act means "a claim of right". The Court added, at page 1047, that the spouse's rights with respect to the income of the trust "must be exclusive and no other person can have any intrusionary rights vis à vis the trust be they immediate or in the future while the spouse is living."

Pursuant to subparagraph 70(6)(b)(ii) of the Act, in order for a trust to qualify as a spousal trust it must also provide that no person except the spouse or common-law partner may, before the spouse's or common-law partner's death, receive or otherwise obtain the use of any of the income or capital of the trust. In this regard, the Court, in the case of the Estate of Albert N. Gilbert v. M.N.R., 83 DTC 645 (T.R.B.), held that the word "may" in subparagraph 70(6)(b)(ii) of the Act should be construed as "permissive" (see also section 11 of the Interpretation Act). Such an interpretation was accepted in the Peardon case, where the Court added the following comments at page 1047:

"There does not have to be any benefit obtained by any person, other than the spouse; the mere possibility is enough to say that the trust does not comply fully with the provisions requisite in the Act (this latter statement has as its authority the case of the Estate of Donald Murdoch Clouston v. M.N.R., 74 DTC 1176, which dealt with a similar provision in the Estate Tax Act)."

It flows from these decisions that the mere existence of a power to encroach on the capital or income of the trust for the benefit of persons other than the spouse or common-law partner, prior to the spouse's or common-law partner's death, is sufficient to disqualify a trust from being a spousal trust. The same result would occur if the trustees of a trust were given complete discretion as to the allocation of the trust's income and capital among members of the taxpayer's family during the life of the spouse. Encumbrances or obligations of a trust to pay amounts to persons other than the spouse or common-law partner during the spouse's or common-law partner's lifetime will disqualify the trust from being a spousal trust.

The above comments are an expression of opinion only and are not binding on the Canada Customs and Revenue Agency, as explained in paragraph 22 of Information Circular 70-6R4. We trust that the foregoing will be of assistance to you.

Yours truly,

Alain Godin, Manager
International and trusts Section
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch