Principal Issues: a) Once a joint spousal or common-law partner trust is created jointly by spouses or common-law partners using jointly-owned property, can further contributions be made by the spouses or common-law partners at any time, in any form?
b) How is income computed in respect of the contributed property? Assume Spouse A and Spouse B contribute portfolios X and Y respectively. Assume both Spouse A and Spouse B are discretionary capital beneficiaries such that subsection 75(2) applies to both of them.
Position: a) Once a joint spousal or common-law partner trust is created, contributions are not limited only to the initial settlement of the trust or to only jointly-owned property.
b) In the situation described in the example, any income or loss from the investments in portfolio X or from property substituted for the investments in portfolio X, and any taxable capital gain or allowable capital loss from the disposition of the investments in portfolio X or of property substituted for the investments in portfolio X, will be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of Spouse A, while Spouse A is resident in Canada.
Similarly, any income or loss from the investments in portfolio Y or from property substituted for the investments in portfolio Y, and any taxable capital gain or allowable capital loss from the disposition of the investments in portfolio Y or of property substituted for the investments in portfolio Y, shall, while Spouse B is resident in Canada, be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of Spouse B.
Reasons: See below.
2022 STEP CRA Roundtable – June 15, 2022
QUESTION 11. Joint Spousal or Common-law Partner Trust
At the 2021 STEP CRA Roundtable, the CRA confirmed that a joint spousal or common-law partner trust may be created with a contribution of jointly-owned property by an individual and the individual’s spouse or common-law partner.
We have two questions.
a) Once the joint spousal or common-law partner trust is created, can further contributions be made by the spouses or common-law partners at any time, in any form? For example, we assume the contributions are not limited to the initial settlement or to only jointly-owned property.
b) How is income computed in respect of the contributed property where subsection 75(2) (footnote 1) is applicable? For example, assume that subsequent to the initial contribution by Spouse A and Spouse B, they contribute portfolios X and Y, respectively, to a joint spousal trust. Assume both Spouse A and Spouse B are discretionary capital beneficiaries such that subsection 75(2) applies to both of them.
CRA Response
a) Contributions
In our response to Question 12 of the 2021 STEP CRA Roundtable (footnote 2) , we stated that if a trust was created by the contribution of jointly-owned property by an individual and the individual’s spouse or common-law partner and no other person, the trust would be considered to be created by both individuals for purposes of subsection 73(1.01). Further, we indicated that as long as a trust was created by both individuals and no one else, and the other conditions in subsections 73(1), (1.01) and (1.02) were met, a transfer of property by either spouse or common-law partner or both spouses or common-law partners to the trust after its creation would be eligible for the rollover provided in subsection 73(1).
As such, where a joint spousal or common-law partner trust is created by the contribution of jointly-owned property by spouses or common-law partners, contributions are not limited only to the initial settlement of the trust or to only jointly-owned property. With respect to contributions made subsequent to the initial contribution, a transfer of property held solely by either spouse or common-law partner, or a transfer of property jointly held by both spouses or common-law partners, to the joint spousal or common-law partner trust would be eligible for the rollover provided in subsection 73(1).
b) Attribution
Subsection 75(2) is an attribution rule applicable in respect of trusts factually resident in Canada and created since 1934. The rule generally applies where property is held by such a trust on condition that:
- the property, or property substituted for it, may revert to the person from whom it was directly or indirectly received, or pass to persons determined by that person subsequent to the creation of the trust, or
- during the existence of the person, the property may be disposed of only with the person’s consent or in accordance with the person’s direction.
When either of these conditions is met, any income or loss from or taxable capital gain or allowable capital loss in respect of the property, or property substituted for it, is attributable to that person while resident in Canada. Accordingly, any amounts attributable are determined in respect of a particular property, or property substituted for that property.
As such, in the situation described in the example whereby Spouse A transfers the investments in portfolio X to a joint spousal trust, any income or loss from the investments in portfolio X or from property substituted for the investments in portfolio X, and any taxable capital gain or allowable capital loss from the disposition of the investments in portfolio X or of property substituted for the investments in portfolio X, will be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of Spouse A. Such amounts will continue to be attributable to Spouse A as long as the investments in portfolio X transferred by Spouse A, or property substituted for any of those investments, continue to be held by the trust and while Spouse A is resident in Canada.
Similarly, any income or loss from the investments in portfolio Y or from property substituted for the investments in portfolio Y, and any taxable capital gain or allowable capital loss from the disposition of the investments in portfolio Y or of property substituted for the investments in portfolio Y, will be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of Spouse B. Similar to above, as long as the investments in portfolio Y transferred by Spouse B, or property substituted for any of those investments, continue to be held by the trust and while Spouse B is resident in Canada, such amounts will continue to be attributable to Spouse B.
Additionally, subsection 75(2) does not apply to second generation income, as this income is not earned on property contributed to the trust. For example, if the property received from a person is money which is deposited by the trust into a bank account, the interest on the initial deposit will attribute to that person but interest earned on the interest left to accumulate in the bank account will not attribute.
Katie Robinson
2022-092933
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Unless otherwise stated, all statutory references herein are to the Income Tax Act (Canada).
2 CRA document 2021-0885671C6.