2 June 2003 External T.I. 2003-0014515 - Spouse's discretion to accumulate inc intrust

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: Does a trust that retains income at the discretion of the spousal beneficiary lose its status as a spousal trust?

Position: No

Reasons: As stated in previous positions, the spousal beneficiary must have a legal right to enforce payment of all the income of the trust while the spouse is alive; thus a trust which gives the trustee the discretion to accumulate income is not a spousal trust but if the spouse has the discretion to direct the trustees to accumulate, it will not taint the trust.

XXXXXXXXXX 	2003-001451
		Annemarie Humenuk
Attention:  XXXXXXXXXX 

June 2, 2003

Dear XXXXXXXXXX:

Re: Post-1971 Spousal or Common-law Partner Trust

This is in reply to your letter of April 15, 2003, concerning the meaning of the phrase "entitled to receive" as found in subsection 70(6) of the Act.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

You submitted draft wording to be used in a will to set out the terms under which a surviving spouse would be entitled to receive the income of the trust and asked us to confirm whether such wording would meet the requirements of subparagraph 70(6)(b)(i) such that the trust would qualify as a post-1971 spousal or common-law partner trust as defined in subsection 248(1).

The particular circumstances outlined in your letter appear to relate to a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, it is not our practice to comment on transactions involving a specific taxpayer, except by way of an advance income tax ruling. When the transaction related to the enquiry is completed, the enquiry should be addressed to the relevant tax services office. 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 deed or testamentary instrument which created the trust.

A post-1971 spousal or common-law partner trust is a trust created after 1971 which provides that the spouse or common-law partner (the "spouse") of the individual who created the trust is entitled to receive all income of the trust during the lifetime of that spouse, and which permits no one other than the spouse to receive or obtain the use of any of income or capital of the trust before the death of that spouse. It is our view that the phrase "entitled to receive all the income of the trust" in subparagraph 70(6)(a)(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 terms of the trust make it clear that the spouse is to receive all income of the trust but the spouse indicates to the trustees in writing that she does not wish to receive such income for a particular year, the fact that such income is retained by the trust, at the spouse's discretion, and added to the capital of the trust will not, by itself, disqualify the trust as a post-1971 spousal or common-law partner trust. If, however, the trustees 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 and that the trust is not a post-1971 spousal or common-law partner trust.

In addition, we noted that, notwithstanding any direction by the spouse for a particular taxation year to retain the income in the trust, the trust income for that year would still be payable to the spouse within the meaning of subsection 104(24) of the Act. Consequently, such income would be included in computing the income of the spouse for that year regardless of whether or not the income was paid to the spouse, unless the trust made an election under subsection 104(13.1) for the year in question.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance.

Theresa Murphy
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch