By September 20 2016
Tax Law

Inter Vivos Spousal Trust

Spousal trusts are special purpose trusts, set up for the benefit of the spouse or common law partner (same sex, or opposite sex) of a taxpayer.

A spousal trust can be created under a will and become effective upon the death of the will maker, known as a testamentary spousal trust, or, the spousal trust can be formed during the lifetime of the taxpayer, called an inter vivos spousal trust. Once the trust is properly formed, it will be governed by the Income Tax Act (Canada) (the "Act") for tax purposes.

This blog entry will review the benefits of creating an inter vivos spousal trust by a taxpayer (the "Settlor") and the requirements to properly form such a trust.

Benefits

There are several tax planning benefits to creating a spousal trust during the lifetime of the taxpayer, including:

  1. Assets can be transferred into the spousal trust on a tax deferred, roll-over basis[1];
  2. Capital losses or capital gains exemptions that may be available at the time assets are transferred to the spousal trust can be utilized on an asset-by-asset basis by electing out of the rollover;
  3. Income can be split amongst the remainder of the beneficiaries;
  4. Assets can be protected;
  5. The amount of taxes, or probate fees, that may be applicable upon the death of the Settlor may be reduced or deferred;
  6. The administration of the Settlor’s estate may simplified and not made public knowledge since assets in the spousal trust will not be subject to the probate process; and
  7. Assets can be preserved for future generations by limiting the opportunities to waste assets.

Requirements

In order to form a spousal trust and properly transfer property into the spousal trust, the following conditions must be met:

  1. The trust must be settled by the Settlor, being the spouse or common-law partner of the original beneficiary[2];
  2. The spouse or common law partner of the Settlor must be entitled to receive all of the income of the trust during that person's lifetime;
  3. No other person, for as long as the spouse or partner is alive, can receive or use any of the income or the capital from the trust[3];
  4. the original beneficiary must be the legally married spouse, or the common-law partner (same sex, or opposite sex) of the Settlor; and
  5. The Settlor must be resident in Canada at the time of the transfer.

Deemed Disposition

The spousal trust will be deemed to have disposed of, and re-acquired, all of its assets at their then fair-market value at the occurrence of certain events:

  1. The death of the spouse or common law partner; and
  2. every 21 years thereafter[4].

Other Considerations:

Additional planning measures may be necessary to address real property in the United States, and the deemed disposition that arises if the Settlor permanently moves outside of Canada, so that the estate planning benefits of the spousal trust are not compromised.

Invitation for Discussion:

If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Tax & Estate Planning group at Shea Nerland LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

[1] Subsection 73(1) of the Act.

[2] Paragraph 73(1.01)(c) of the Act.

[3] Subparagraph 73(1.01)(c)(i) of the Act.

[4] Subparagraphs 104(4)(a)(ii) and 104(4)(a)(iii) of the Act.

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