| 19(1) | File No. 5-9610 |
| A.B. Adler | |
| (613) 957-8962 |
March 27, 1990
Dear Sirs:
This is in reply to your letter dated February 7, 1990 in which you raised a number of questions concerning the following situation.
Variance of Spouse Trust
We are to assume that a taxpayer (A) died and left all property to a spousal trust which met all the qualifications under paragraph 70(6)(b) of the Income Tax Act ("Act"). The beneficiary of the trust is his spouse from his second marriage. Further, after the death of taxpayer A, his spouse decides she has been treated too generously at the expense of the children from taxpayer A's first marriage.
The assets of the spouse trust would consist of:
a) farmland of taxpayer A
b) deferred annuity contracts
c) income averaging annuity contracts ("IAAC").
The spouse and the children apply to have the courts alter the will so that the annuities stay in the trust and the land passes directly to the spouse and the children without being part of the trust. This is accomplished within 36 months of the date of death of taxpayer A.
As indicated in paragraph 23 of Information Circular 70-6R we do not give written opinions on proposed transactions. However, we are prepared to provide you with the following general comments.
By reason of subsection 61.1(2) of the Acts payments received by a spouse trust from an IAAC will be deemed to be payments under the IAAC, and will be subject to inclusion in the trust's income under paragraph 56(1)(d) of the Act.
Depending upon the facts, the accrual basis rule in subsection 12.2(3) of the Act, rather than the received bases rule in paragraph 56(1)(d) therein, may apply to the deferred annuity contracts held by the spousal trust. We suggest that you discuss this matter with relevant officials at your nearest district taxation office.
An essential requirement for a transfer of property to a spouse or to a child to qualify under subsection 70(6) or (9) of the Act, as the case may be, is that the property be transferred as a consequence of a taxpayer's death. We question whether a transfer of property under a court ordered variation of a will made at the request of any beneficiary of an estate, and for his or her benefit, would satisfy this requirement. Should you wish to pursue this matter further we suggest that you consider making a request for an advance ruling.
We trust that our comments will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate