8 March 1991 Administrative Letter 901526 F - Whether Surviving Spouse's Decision to Forgo an Income Interest under a Trust is a Release or Surrender of an Interest

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.

Dear Sirs:

This is in reply to your letter of July 5, 1990 wherein you requested our opinion on three hypothetical scenarios provided by you.  We apologize for the unavoidable delay in our reply.

In respect of your first scenarios you asked if it was our position that a surviving spouse's decision to forgo an income interest under a trust is a release or surrender of an interest, as contemplated under paragraph 248(8)(b) of the Income Tax Act (the "Act"), such that the provisions of paragraph 70(6)(a) will apply, when that decision is made in accordance with the provisions of the Family Law Act of Ontario (the "FLA").

The FLA provides a surviving spouse with a right to receive an amount if that spouse elects to receive his or her entitlement under section 5 of the FLA.  The FLA however does not otherwise direct which properties of the deceased's estate are to be paid in satisfaction of the entitlement.  Instead, as we understand it, the courts will provide directions as to what specific properties should be distributed to the surviving spouse.

When the deceased spouse dies testate, the FLA also provides in subsection 6(7) that the election to receive the FLA entitlement will cause the revocation of any gifts provided to the surviving spouse under the will unless the will specifically provides otherwise.  Similarily, if the deceased dies intestate, the FLA provides in subsection 6(8) that the surviving spouse will be deemed to have disclaimed any entitlements otherwise available under Part 11 of the Succession Law Reform Act of Ontario (the "SLRA").

The Department has taken the position that the revocation of any gifts in a will in consequence of the FLA election will constitute a disclaimer for purposes of section 248(8)(b) of the Act such that subsection 70(6)(a) of the Act will apply to any particular properties transferred to the surviving spouse in satisfaction of the election.  The Department is prepared to apply this interpretation where the property is transferred in satisfaction of the elected FLA entitlement, and the transfer is made under court order.  The Department is not prepared to allow this treatment to any transfers in excess of the elected amount or those that are not made in consequence of an application to the court.

If, as noted above, a deceased's will specifically provides that gifts to the surviving spouse under the will are in addition to his or her FLA entitlement, a spouse trust created under the will may continue to exist as such.  If the spouse receives property from the trust in accordance with an agreement with the trustee, the property will be subject to the provisions of section 106 of the Act.  However, if a valid disclaimer of the gift is made the income interest will cease to exist and unless a contingent income beneficiary is provided under the will, the trust will continue to exist until the death of the surviving spouse.

Where a surviving spouse has no continuing interests under a will in addition to the FLA entitlement, subsection 6(7) of the FLA provides that the deceased's will must be interpreted as if the surviving spouse had died first.  In this case any property remaining in the estate after satisfaction of the FLA entitlement would generally pass directly to the remaindermen under the will without going through a spouse trust.

In respect of your second scenario you stated that it has been suggested, by analogy, that if subsection 70(6.1) deems a trust to be created by virtue of the deceased's will where a court order under the FLA actually creates a trust, then an FLA court order transferring property directly to the surviving spouse should be considered a transfer to the spouse under the will, and asked if this was a correct interpretation and if, in consequence, the property transferred would be eligible for treatment under subsection 70(6) of the Act.

In our opinion subsection 70(6.1) of the Act cannot apply unless a trust is created under the terms of a taxpayer's will or by a court order as described in paragraph 70(6.1)(b).  However, as stated in IT 449R at paragraph 7, where a property is transferred to a spouse pursuant to a court order given under a statute such as a family law act, paragraph 70(6)(a) of the Act may apply to the transfer if the court order is made within 36 months after the death of the deceased or such longer period as is reasonable, provided the requirements for extending the period, as discussed in IT 449R, are complied with.     

Your final scenario deals with the situation where a surviving spouse is entirely excluded from any share under the will of a deceased spouse and is therefore neither a beneficiary under the will nor a beneficiary on the intestacy of the deceased spouse because there was a will and Part II of the SLRA has no application.

When there is a transfer of property to the surviving spouse under the provisions of an FLA in this type of situation, the Department is prepared to apply the provisions of subsection 248(8) of the Act as if the surviving spouse was named as a beneficiary under the will.

We trust that these replies are satisfactory to your needs.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate