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: Whether a joint spousal or common-law partner trust will maintain its status after a divorce for purposes of paragraph 104(4)(a). Whether the deemed disposition rules in paragraph 104(4)(a) would apply on the death of the latter of the two ex-spouses.
Position: Provided the trust originally qualifies as a joint spousal or common-law partner trust, it will continue to be treated as such after a divorce. Yes.
Reasons: Our comments in paragraph 11 of IT-325R2 also apply to a joint spousal or common-law partner trust. Clause 104(4)(a)(iv)(B) will apply so that the joint spousal or common-law partner trust is deemed to dispose of its capital property on the later death of the settlor and the settlor's ex-spouse.
March 22, 2013
Re: Status of Joint Spousal or Common-law Partner Trust
This is in response to your email dated December 28, 2012 in which you requested our views of your analysis of a hypothetical situation in which a spouse ("Mr. A") has settled an irrevocable trust which qualifies as a joint spousal trust, as defined in subsection 248(1) of the Income Tax Act (the "Act"). The primary beneficiaries of the trust are Mr. A and Mrs. A, both of whom are Canadian residents. The terms of the Trust provide that while either Mr. A or Mrs. A is alive, no one other than Mr. A or Mrs. A may receive any of the capital or income of the trust. We have assumed your reference to a joint spousal trust' is to a joint spousal or common-law partner trust' defined in subsection 248(1).
You have suggested that should Mr. A and Mrs. A obtain a divorce, the joint spousal or common-law partner trust would continue after the divorce for purposes of paragraph 104(4)(a) of the Act. You also concluded that the deemed disposition rules found in subparagraph 104(4)(a)(iv) would apply on the latter of the death of Mr. A and Mrs. A.
Paragraph 11 of Interpretation Bulletin 325R2, Property Transfers After Separation, Divorce and Annulment discusses the impact of a divorce or annulment on the status of a spousal trust as described in paragraph 10 therein. Paragraph 11 states:
A spousal trust continues to be spousal trust even after a divorce or annulment. Subsection 104(4) will apply so that the spousal trust is normally deemed to dispose of its capital property, other than depreciable property, at fair market value on the death of the spouse.
In our view, the discussion in paragraph 11 of IT-325R2 is equally applicable to a joint spousal or common-law partner trust. Accordingly, we agree with your conclusions.
This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5. We hope our comments will be of assistance.
Trusts Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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