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: Does a spousal trust cease to be such upon the death of the spousal beneficiary?
Position: No
Reasons: In order to be a trust to which 104(4)(a)(i) applies, a testamentary trust must meet the conditions in 104(4)(a)(iiii) and (iv) at the time it is created
April 4, 2000
Ottawa Taxation Centre HEADQUARTERS T3 Estate Returns Processing A. Humenuk Margaret O'Hara, Manager
Attention: Linda Desrochers 2000-000781
XXXXXXXXXX
This is in response to your memorandum of February 15, 2000, concerning the relevant day or days on which the above-noted trust is required to report a deemed disposition under subsection 104(4) of the Act.
Our understanding of the facts are as follows:
1. XXXXXXXXXX died on XXXXXXXXXX, and by his will, established a trust under which his spouse was the sole income beneficiary until her death at which time, his son and daughter-in-law would presumably become income beneficiaries. Although a copy of the will was not available for our review, it is our understanding that the trust qualified as a spousal trust at the time it was created and that the will provided for the continuation of the trust after the death of the spouse. The testamentary trust's taxation year ends on XXXXXXXXXX.
2. XXXXXXXXXX, the spousal beneficiary of the above-noted trust, died on XXXXXXXXXX. It is not clear from the information provided whether the trust reported any gains or losses in its XXXXXXXXXX taxation year as a result of the deemed disposition of the trust's assets under subparagraph 104(4)(a)(i) and if so, whether the trust return was amended to reverse such gains or losses as a result of the comments contained in the February 28, 1997 letter from B. Teeter of your office.
3. Effective for the trust's XXXXXXXXXX taxation year, the trust was incorrectly classified by the trustee as a non-spousal testamentary trust and the trustee filed an election under subsection 104(5.3) in prescribed form on XXXXXXXXXX. On XXXXXXXXXX, the trustee requested the election be disregarded on the basis that the trust was not subject to a deemed disposition of any of its property in its XXXXXXXXXX taxation year.
Subsection 104(5.3) was amended by S.C. 1996 c. 21 to limit the deferral period previously provided by means of an election under that subsection. As a result, any trust which filed an election under subsection 104(5.3) before 1999 is deemed to have disposed of each capital property (other than excluded property) of the trust no later than January 1, 1999. The deemed disposition for depreciable property is covered by subsection 104(5) rather than by subsection 104(4). You ask for our views on whether the above-noted trust is required to report a deemed disposition of its capital properties in its 1999 taxation year, and if not, when the next deemed disposition under subsection 104(4) will occur for this trust.
Our Comments
As discussed by telephone on March 21, 2000 (Desrochers\Humenuk), an examination of the will or trust indenture is required in order to determine the days on which the trust is required to report a deemed disposition under subsection 104(4). However, we trust the following comments may assist you in making such a determination.
Under subparagraph 104(4)(a)(i), a trust created by the will of a taxpayer who died after 1971 is deemed to have disposed of each capital property (other than excluded property) of the trust on the day the spousal beneficiary dies, if the conditions in subparagraphs 104(4)(a)(iii) and (iv) are met at the time the trust was created. Such trusts are referred to as spousal trusts but, under draft legislation released December 17, 1999, it is proposed that a trust of this type be defined as a "post-1971 spousal trust". Since the relevant time for determining whether a testamentary trust is a spousal trust as described in subparagraph 104(4)(a)(i) is the time at which it was created, such a trust will continue to be a spousal trust after the spousal beneficiary dies unless it is wound up at that time.
Based on our understanding of the facts in the above-noted case, the election filed by the trust on XXXXXXXXXX under subsection 104(5.3) would be invalid as neither paragraph 104(4)(a.1) nor (b) applies in this instance with the result that the testamentary trust created by the will of XXXXXXXXXX would not have a "disposition day" as that term is used in subsection 104(5.3) for its XXXXXXXXXX taxation year. Accordingly, assuming that the trust is not wound up beforehand, the next deemed disposition required to be reported by the testamentary trust under subsection 104(4) would occur on XXXXXXXXXX, the day that is 21 years after the day on which the deemed disposition under subparagraph 104(4)(a)(i) occurred (the date specified in subparagraph 104(4)(b)(iii)).
If you have any further questions concerning this matter, and in particular if our understanding of the facts as stated above is not correct, please contact Annemarie Humenuk at (613) 957-8585.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the CCRA's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (819) 994-2898. The severed copy will be sent to you for delivery to the client.
T. Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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