28 November 1998 External T.I. 9819485 - PRE-1972 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 Department.

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

Principal Issues:

1. Can a trust qualify as a pre-1972 spousal trust even if a non-interest bearing loan has been made to a beneficiary other than the spouse?

2. Can a trust qualify as a pre-1972 spousal trust if the trustee has discretionary power in allocating income among the spouse and other beneficiaries, provided that in fact no income was allocated to a beneficiary other than the spouse?

Position:

1. No.

2. No.

Reasons:

1, The non-interest bearing loan to one of the other beneficiaries would be seen as capital of the trust being “used”’ by a person other than the spouse.

2. The trustee has full discretionary power in allocating income among the spouse and settlor’s children, and thus the spouse is not “entitled” to the income of the trust.

XXXXXXXXXX J.D. Brooks
981948

Attention: XXXXXXXXXX

November 28, 1998

Dear Sirs:

This is in reply to your letter of July 31, 1998 in which you requested our views concerning the definition of “pre-1972 spousal trust” in subsection 108(1) of the Income Tax Act. You presented a hypothetical scenario for our consideration and the facts of that scenario are restated more generally as follows:

A man died in late 1971 and a testamentary trust was created for the benefit of his wife and children. Although the trustee of the trust had full discretionary power in allocating the trust’s income as well as encroaching on capital and allocating it among the beneficiaries, only the wife has ever received any distribution of income or capital. However, subsequent to 1971, a non-interest bearing loan with no specified terms of repayment was made to one of the children. The wife is currently alive.

Our Comments

Although you have asked for a technical interpretation, the scenario presented appears to be an actual fact situation. Should this situation involve a proposed transaction, you may wish to submit all relevant facts and proposed transactions for a binding advance income tax ruling. However, should this situation involve actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation (including identification numbers) to the appropriate Tax Services Office for their comments. We are, however, prepared to provide some general comments.

In order for a trust that was created by the will of a taxpayer who died before 1972 to qualify as a “pre-1972 spousal trust” as defined in subsection 108(1) of the Income Tax Act, the spouse of the taxpayer must be entitled to receive all of the income of the trust throughout a specified period of time that commenced at the time the trust was created.

In the hypothetical scenario, the spouse was not initially entitled to receive all of the income since the trustee had full discretionary power in allocating the trust’s income among all of the beneficiaries. Accordingly, the terms of the definition of “pre-1972 spousal trust” would not be met.

The definition of “pre-1972 spousal trust” also requires that no person other than the spouse can have received or otherwise obtained the use of any of the income or capital of the trust throughout the specified period of time. In the hypothetical scenario, the non-interest bearing loan with no specified terms of repayment which was made to one of the children beneficiaries would constitute a use of capital of the trust. Thus, the loan would also cause the trust to not be described as a pre-1972 spousal trust.

As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not an advance income tax ruling and consequently, is not binding on Revenue Canada.

We trust our comments will be of assistance to you.

Yours truly,

T. Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

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