Mr. X's will provided a testamentary trust for Ms. X, who was entitled to all the income, with their children as the capital beneficiaries on her death. Ms. X chose not to receive all of the trust income, so that the undistributed income was taxed in the trust’s hands. In the event of her incapacity, Mr. X's will provided that expenses incurred by Ms. X for her daily maintenance, health care, housing, etc. would be paid directly by the trustee rather than distributed to her committee for payment thereof by him or her.
Regarding the income-retention arrangement, CCRA indicated:
- such amounts formed part of the trust's capital for subsequent taxation years for s. 70(6)(b) purposes; and
- such addition to the trust’s capital would not, in itself, disqualify the trust as a testamentary spousal trust within the meaning of s. 70(6)(b).
- any distribution of those amounts by the trust in a subsequent taxation year would constitute a distribution of capital for purposes of the Act.
Regarding the direct payment of expenses, CCRA stated:
[T]he payment of any income from the trust to a person other than the spouse or common-law partner, according to the will or a provision of the will dealing with the payment, does not disqualify a trust that otherwise qualifies as a spousal trust to the extent that those amounts are used solely for the benefit of the spouse or common-law partner and that the spouse or common-law partner (or their legal representative, as the case may be) has expressly or implicitly given his or her consent.