19 April 1990 Income Tax Severed Letter AC59541 - Spouse Trusts - Deemed Disposition

5-9541
                                                   D.S. Delorey
                                                   (613) 957-3495

April 19, 1990

Dear Madam:

Re: Spouse Trusts Deemed Dispositions

This is in reply to your letter of February 1- 1990 concerning the deemed disposition rules contained in subsection 104(4) of the Income Tax Act (the "Act") where the trust is one described in subparagraphs l04(4)(a)(iii) and (iv) of the Act (a "spouse trust").

In particular, you cite the following 15 situations and ask us to confirm the date of the first deemed disposition under subsection 104(4) in each situation.

         Type of         Death of                     Date of First
         Trust          Taxpayer   - Death of Spouse     Deemed  
                                                      Disposition

1.  Testamentary      Before 1972   Before 1972      January 1,1993
2.  Testamentary      Before 1972   January 1, 1972  Death ofSpouse
                                    December 31, 1975
3.  Testamentary      Before 1972   January 1, 1976
                                    - May 25, 1976  January 1, 1993
4.  Testamentary      Before 1972  After May 25, 1976 January 1,1993
5.  Testamentary      After 1971    January 1, 1972
                                    - December 31,1975    Death of 
                                                          Spouse
6.  Testamentary      After 1971    January 1, 1976
                                    - May 25, 1976        Death of 
                                                          Spouse
7.  Testamentary      After 1971    After May 25,  1976   Death of 
                                                          Spouse
8.  5.122(2)         n/a           Before 1972           January 1, 
                                                         1993
9.  5.122(2)          n/a           January 1, 1972
                                    - December 31,1975    Death
of 
                                                          Spouse
10. 5.122(2)          n/a           January 1, 1976
                                    - May 25, 1976        Death of 
                                                          Spouse

11. 5.122(2)          n/a           After May 25, 1976    January

                                                          1, 1993
12. 5.122(l)          n/a           Before 1972           January

                                                          1, 1993
13. 5.122(l)          n/a           January 1, 1972
                                    - December 31, 1975   Death of 
                                                          Spouse
14. 5.122(l)          n/a           January 1, 1976
                                    - May 25, 1976        Death of 
                                                          Spouse
15. 5.122(1)          n/a           After May 25, 1976    Death of 
                                                          Spouse

We agree that the "date of first deemed disposition" shown above reflects the correct date under subsection 104(4) of the Act in each situation.

In situations 4 and 11 above, you suggest that the 1976 amendment to subsection 104(4) was not intended to trigger a deemed disposition on January 1, 1993 where the spouse is alive on that date and you ask for our comments in this regard.

There is nothing in our files to indicate that the dates of deemed disposition in situations 4 and 11 above are unintended, nor do we consider them to be unintended. It is our view that the intent of the 1976 amendments, which are reflected in the present subsection 104(4), was to have paragraph 104(4)(b), rather than 104(4) (a), apply to spouse trusts created before the coming-into-force of the provisions of the Tax Reform Act, which act is reflected in the 1972 Income Tax Act. In other words, the intent in our view was to apply to such spouse trusts the 21-year rule applicable to other types of trusts. While this might be detrimental to the spouse trust where the spouse remains alive after 1992, it is a benefit to the spouse trust where the spouse dies before 1993 such as in situation 3 above.

In situation 3 above, and 4 and 11 above where the spouse has died, you suggest that the trustee may have inadvertently reported a deemed disposition on the death of the spouse. Where this has occurred, you ask if the Department would allow the next date of deemed disposition to be 21 years from the date of the spouse's death, rather than January 1, 1993. It is our view that the law as it presently reads must be adhered to; i.e., a deemed disposition must be recognized on January 1, 1993, where applicable, notwithstanding that an earlier deemed disposition may have been inadvertently reported. Where a trust has inadvertently reported an earlier deemed disposition, the trust representative should contact officials of the relevant District Taxation Office to see if consideration will be given to reducing the capital gains resulting from the 1993 deemed disposition by the capital gains previously reported.

The above comments are an expression of opinion only and are not binding on the Department, as explained in paragraph 24 of Information Circular 70-6R. We trust however that they are of assistance to you.

Yours truly,

for Director Financial Industries Rulings Directorate