4 June 2024 STEP Roundtable Q. 1, 2024-1007861C6 - Spousal Trust and Contribution

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: If the spouse or common-law partner beneficiary of a inter vivos spousal or common-law partner trust dies and the trust receives a contribution of capital from a person other than the individual who created the trust, what are the implications? (A) Does the trust cease to be a spousal or common-law partner trust for purposes of the ITA? (B) If the trust continues beyond the death of the beneficiary spouse or common-law partner what will be the next deemed disposition date as determined under subsection 104(4)?

Position: (A) No. (B) Pursuant to subparagraph 104(4)(b)(iii) the trust will have its next deemed disposition on the day that is 21 years after the day of death for which the first deemed disposition was previously determined under paragraph 104(4)(a).

Reasons: (A) A contribution of capital to the spousal or common-law partner trust after the death of the spouse or common-law partner beneficiary does not cause the trust to cease to meet the conditions in subparagraphs 104(4)(a)(ii) and 104(4)(a)(iii). (B) As the trust will continue to be a post-1971 spousal or common-law partner trust, the carve out in subparagraph (g)(i) of the definition “trust” in subsection 108(1) applies.

2024 STEP CRA Roundtable – June 4, 2024

QUESTION 1. Spousal Trust and Contribution

An inter vivos trust which meets certain conditions in section 73 of the Act (footnote 1) (namely subparagraph 73(1.01)(c)(i)) is commonly known as a spousal or common-law partner trust. By virtue of paragraph 104(4)(a), a spousal or common-law partner trust will have its first deemed disposition of certain property at the end of the day on which the death of the beneficiary spouse or common-law partner occurs, and not on the 21st anniversary of the trust’s creation.

If the trust initially meets the requirements of a spousal or common-law partner trust and after the spouse or common-law partner beneficiary dies the trust receives a contribution of capital property from a person other than the individual who created the trust, what are the implications? More specifically:

A. Does the trust cease to be a spousal or common-law partner trust for purposes of the Act?

B. When does the deemed disposition under subsection 104(4) arise in respect of the property added to the trust?

CRA Response

Part A

Subparagraphs 104(4)(a)(ii) and 104(4)(a)(iii) together describe a spousal or common-law partner trust as a trust created after June 17, 1971 by a taxpayer during the taxpayer’s lifetime that, at any time after 1971, was a trust under which the taxpayer’s spouse or common-law partner was entitled to receive all of the income of the trust that arose before the spouse’s or common-law partner’s death and no person except the spouse or common-law partner could, 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.

Subparagraph 73(1.01)(c)(i) and subparagraph 104(4)(a)(iii) are identical in respect of who must create the trust and the conditions relating to the income and capital of the trust.

After the death of the beneficiary spouse or common-law partner, where a spousal or common-law partner trust receives a contribution from a person other than the spouse or common-law partner that created the trust, the trust will continue to be a spousal or common-law partner trust for purposes of the Act. However, the transfer of capital property will not occur on a tax-deferred basis under subsection 73(1). The transfer will occur at fair market value and, as such, will generally result in a capital gain (or capital loss) to the transferor.

Part B

By virtue of paragraph 104(4)(a), the spousal or common-law partner trust will have already had its first deemed disposition at the end of the day on which the death of the beneficiary spouse or common-law partner occurred. (footnote 2)

Where the trust continues beyond the death of the beneficiary spouse or common-law partner, pursuant to subparagraph 104(4)(b)(iii) the trust will have its next deemed disposition on the day that is 21 years after the day of death for which the first deemed disposition was previously determined under paragraph 104(4)(a). Any further deemed dispositions would occur every 21 years, pursuant to paragraph 104(4)(c).

The deemed disposition dates as determined in subsection 104(4) apply to each property of the trust. The dates are not tied to specific properties.

Although paragraph (g) of the definition of “trust” in subsection 108(1) generally provides that subsection 104(4) does not apply to a trust all interests in which, at that time, have vested indefeasibly, certain types of trusts are carved out of that treatment by virtue of subparagraphs (i) to (vi). Since the trust would be a “post-1971 spousal or common-law partner trust”, the carve out in subparagraph (i) applies. As a result, the deemed disposition rule in subsection 104(4) will continue to apply.

William King
2024-100786

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 The Act means the Income Tax Act R.S.C. 1985 (5th Supp.) c.1 as amended from time to time and consolidated to the date of this response and, unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.

2 Further, as a result of this death, the trust’s taxation year in which the death occurs will be deemed to have ended on the same day, in accordance with paragraph 104(13.4)(a). In addition, a new taxation year of the trust is deemed to begin immediately after that day.