Under a spouse trust, the spouse has the exclusive and unconditional right to all annual income but it remains in the spouse's discretion to not require the annual payment of all income, and any portion of the income not so distributed to be added to the trust capital distributed to the spouse, at the spouse's discretion, in the same manner as the capital, the spouse being the sole capital beneficiary during the spouse’s lifetime, so that the trustees must distribute all or part of the capital to the spouse at the spouse’s sole request.
Would the trust would lose its status as a testamentary trust if the spouse decided not to require the distribution of all or part of the income or capital for several years? CRA stated:
Where the trust indenture provides that a spouse may elect not to receive income from the trust in a particular year and the spouse makes this election before any income is earned and becomes payable, the making of the election will not be considered to be a contribution of property to the trust by the spouse since the income is not yet property of the spouse at the time the election is made.
On the other hand, if the spouse notifies the trustee that he or she does not want to receive the income from the trust when that income is payable to the spouse, this would result in the spouse contributing property to the trust. In effect, the spouse would hold an amount receivable as property and would pay it to the trust. Thus, in such a situation, the trust would no longer be a "testamentary trust" … .