5-910420
Dear Sir:
Re: Testamentary Spouse Trust
This is in reply to your letter of February 6, 1991 concerning the above-mentioned subject.
As indicated in Information Circular 70-6R2, we do not express opinions on specified proposed transactions other than as a reply to an advance income tax ruling. As a consequence thereof, we may only offer the following general comments.
In a situation such as the one you described in your letter, a distribution of property by the trust in satisfaction of all or part of the spouse's income interest in the trust comes within the provisions of subsection 106(3) of the Act to the extent that the value of the property reasonably represents the value of her income interest immediately before the distribution. To the extent that the value of that part of the income interest which has been disposed of exceeds the value of the property distributed in satisfaction of it we regard that excess as being income within subsection 106(2) of the Act. That is, to the extent that the transaction does not come within subsection 106(3) of the Act, we consider it as a renunciation of a part of an income interest with the income tax consequences described in paragraph 6 of Interpretation Bulletin IT-385R, "Disposition of an Income Interest in a Trust". In such circumstances, the spouse is deemed to have received proceeds equal to fair market value for the portion renounced and it will be subsection 106(2) of the Act, by virtue of paragraph 69(1)(b) of the Act, which would apply to those proceeds.
If the property which is distributed has an adjusted cost base equal to its fair market value on that date, there will be no tax consequences to the trust in making the distribution.
As indicated in paragraph 7 of Interpretation Bulletin IT-305R3, "Establishment of Testamentary Spouse Trust", "once a trust qualifies as a spouse trust under the terms of subsection 70(6), it remains a spouse trust and is subject to the provisions affecting such trusts (e.g., paragraph 104(4)(a)) even if its terms are varied by agreement, legal action or breach of trust".
The wording of subparagraph 104(4)(a)(ii) of the Act is specific in that once it is determined that the trust is a spouse trust that "at any time after 1971" was a spouse trust, its deemed disposition day will be the day on which the spouse dies.
Upon the children becoming absolutely entitled to enforce payments of their respective interests in the trust, it is our view that subsections 104(13) and (104(24) of the Act will apply and that the income of the trust would be included in the children's income for tax purposes under these provisions.
Pursuant to subparagraph 104(15)(a)(i) of the Act, if the spouse is alive at the end of the year, only that spouse can make a preferred beneficiary election on an amount up to the total accumulating income of the trust as defined under paragraph 108(1)(a) of the Act. If the trust indenture specifies that capital gains are income for trust purposes, then the spouse could elect to the full amount of the taxable portion of the capital gain, even if no power of encroachment exists in favour of the spouse.
The above comments reflect only expressions of opinions which, as stated in paragraph 21 of Information Circular 70-6R2, are not binding on the Department. We trust, however, that they will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate