Do trustees of a spousal trust under s. 70(6)(b) have a discretionary power respecting the distribution of income (or capital) of the trust notwithstanding that there is no discretion to distribute the income to (or encroach on capital in favour of) any person other than the spouse? If “no,” would the condition in s. 256(7)(i)(ii) be satisfied?
CRA responded:
[T]he CRA is generally of the view that the trustees of such a trust who have the power to encroach on the capital in favor of the spouse or common-law partner have a discretionary power respecting the capital of the trust.
Subparagraph 256(7)(i)(ii) is broadly worded and provides that at any time at or after the replacement of the trustee, no amount of income or capital to be distributed in respect of an interest in the trust depends upon the exercise, or the failure to exercise, by any person or partnership of a discretionary power. Consequently, depending on the circumstances and terms of the Trust Indenture, the condition set out in subparagraph 256(7)(i)(ii) could not be satisfied in the case of a spousal trust as defined in paragraph 70(6)(b), which would result in paragraph 256(7)(i) not applying to deem there to be no acquisition of control of the corporation. This could be the case inter alia where the trustees of a spousal trust have a power to encroach on the capital in favour of the spouse or common-law partner.