The beneficiary of a testamentary spousal trust renounces all entitlements under the trust (other than income that has accrued to date) without consideration and without having indicated who was entitled to benefit from the renunciation. The residual beneficiaries of the trust, who are prohibited by the trust terms from receiving any distributions during the spouse’ lifetime, then obtain a court order to permit distributions to them prior to the spouse’s death. CRA stated:
The amendment to the trust indenture that would be granted to allow for the distribution of the property would not, in and of itself, result in a disposition of the trust property or by those beneficiaries. However, if there were eventually a distribution of the property to the beneficiaries determined in accordance with article 1286 C.C.Q. by reason of their capital interests in the trust, and the renouncing spouse was not deceased, subsection 107(4) would apply, the trust would be deemed to have disposed of the distributed property for fair market value proceeds and the proceeds of disposition of the capital interests to those beneficiaries would be equal to the amount determined under paragraph 107(2.1)(c).