Principal Issues: Can a trust meet the condition of subparagraph 70(6)(b)(ii) in a situation where the will of a deceased individual creates an usufruct (deemed trust) for the life of his/her spouse, and the terms of the will does not prohibit the bare owner to sell his right in the trust property?
Position: Question of fact and law. Provided that the terms of the will otherwise satisfy the conditions of subsection 70(6), the fact that the bare owner may dispose his/her right should not in and by itself taint the deemed trust.
Reasons: The fact that the bare owner can alienate his right as bare owner should generally not be considered to result in someone other than the spouse of the deceased individual to use the trust property before the death of the spouse.
XXXXXXXXXX 2016-067250 Lucie Allaire, LL.B CPA, CGA, D. Fisc. April 20, 2017
Dear Mr. XXXXXXXXXX,
Subject: Usufruct and spousal trust
This letter is in response to your e-mail of October 19, 2016, in which you requested our views on the application of subparagraph 70(6)(b)(ii) of the Income Tax Act ( the “Act”) in the aforementioned situation.
Unless otherwise indicated, all legislative references are references to provisions of the Act.
In particular, you described the situation of a deceased resident of Quebec who was the sole owner of a rental property (the "Immovable"). The will of the individual provided that he bequeathed ["lègue"] the usufruct of the Immovable to his spouse and the bare ownership to his adult child. The provisions of the will specified that the usufruct could be extinguished only upon the death of the spouse of the deceased individual. On the other hand, the provisions of the will did not prevent the bare owner from disposing of his or her right to a third party before the death of the deceased individual's spouse, to the extent that the potential purchaser of that right respected the usufruct. You add that nothing in the Civil Code of Quebec or the will prevented the bare owner from disposing of his or her right to a third party.
In your opinion, a usufruct is deemed under subsection 248(3) to be a trust for the purposes of the Act (the "Trust") and at the time of its creation, the spouse of the deceased individual acquires an income interest in the Trust, whereas the child, who is the bare owner, acquires the right to the capital.
Your question
You asked whether the fact that the provisions of the will do not prevent the bare owner from disposing of his or her right to a third party causes the Trust to fail to satisfy the condition set out in subparagraph 70(6)(b)(ii).
Our comments
This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Clause 248(3)(a)(i)(B) states, among other things, that a usufruct created by will is deemed to be a trust created by will. Clause 248(3)(a)(ii)(A) states, in particular, that property subject to usufruct is deemed to have been transferred to the trust on and as a consequence of the death of the testator, and subparagraph 248(3)(a)(iii) specifies that the property is deemed to be, throughout the period in which it is subject to the usufruct, held by the trust, and not otherwise. Consequently, in the situation described, following the death of the individual, the Immovable is deemed to be held by the Trust. The spouse of the deceased has an income interest in the Trust and the adult child has a capital interest in the Trust. As such, under paragraph 248(3)(d), both of them are considered to be beneficially interested in the Trust.
Subsection 70(6) applies inter alia in respect of a capital property described in subsection 70(5) that is, as a consequence of the taxpayer’s death, transferred or distributed to a trust created by the taxpayer’s will which meets the conditions set out in subparagraphs 70(6)(b)(i) and (ii) (a "spousal trust"). In addition, it must be demonstrated that the capital property was transferred or distributed and vested indefeasibly in the spousal trust within the period ending 36 months after the death.
Under subparagraph 70(6)(b)(ii), in order for the Trust to qualify as a spousal trust, no person except the spouse or common-law partner of the deceased may, 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.
Whether the Trust complies with the conditions of subsection 70(6) and, more specifically, the condition in subparagraph 70(6)(b)(ii), is a question of fact and law. However, where the will provides that no person other than the deceased's spouse or common-law partner may, before death, receive any part of the income or capital of the Trust or otherwise obtain the use thereof, we are of the view that the fact that the will does not prevent the bare owner from disposing of his or her right should not, in and of itself, cause the condition in subparagraph 70(6)(b)(ii) to not be met.
We hope that our comments will be of assistance.
Louise J. Roy, CPA, CGA
Manager
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch