| 24(1) | 5-901838 |
| M.P. Baldwin | |
| (613) 957-3499 |
19(1)
November 2, 1990
Dear Sirs:
Re: Spousal Trusts
This is in reply to your letter of July 25, 1990. You request that we specifically address 5 questions concerning two different cases regarding spousal trusts.
As noted in Information Circular 70-6R2, we do not express opinions on specific proposed transactions other than as a reply to an advance income tax ruling request. As a consequence thereof, we may only offer the following general comments.
In your letter you stated that it is your understanding that "pursuant to the provisions of the Income Tax Act, the spouse will be taxable on the income realized by the trust as well as any taxable capital gains realized by the trust". However, as stated in Interpretation Bulletin IT-305R3, for the purpose of the spousal trust rules, income of the trust is computed under trust law rather than under the Income Tax Act. Accordingly, if the terms of the trust do not provide that capital gains are to be considered income, there is no requirement that such capital gains are to be distributed to or taxed in the hands of the spouse beneficiary. Such capital gains would therefore be taxed in the hands of the trust unless a preferred beneficiary election is made under subsection 104(15)(a).
Also, as indicated in paragraph 7 of IT-305R3 "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 even if its terms are varied by agreement, legal action or breach of trust". However, when a distribution is made out of a spousal trust to someone other than the spouse, the provisions of subsection 107(4) may be applicable.
We are not aware, at the present time, of any sections of the Income Tax Act which would cause a deemed disposition arising from renouncing or a variance in the provision of the will trust deed whereby the capital gains realized by the trust would be allocated to the capital beneficiaries of the trust and may even be distributed to the beneficiaries.
The above comments reflect only expressions of opinion which, as stated in paragraph 24 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