For tax purposes, spousal trusts are grouped into the following two categories:
Pre-1972 trusts are:
- testamentary trusts created before 1972;
- inter vivos trusts created before June 18, 1971.
The spouse may, during his or her lifetime, receive all of the trust's income. However, no other person may receive or otherwise obtain enjoyment of the trust's income or capital from the date on which the trust is created to the spouse's date of death or January 1, 1993, whichever is earlier.
Post-1971 trusts are:
- testamentary trusts created after 1971;
- inter vivos trusts created after June 17, 1971.
The spouse has the exclusive right, during his or her lifetime, to all the trust's income. No other person, prior to the spouse's death, may receive or otherwise obtain enjoyment of the trust's income or capital.
An inter vivos trust is considered to be a spousal trust if it possesses these characteristics throughout its existence.
If the settlor of a spousal trust transfers property to the trust, the settlor can take advantage of the rollover rule. When this rule is applied, there is no immediate tax incidence for the settlor with respect to the transfer. For more information see Rollover Rule.
However, such a transfer may be subject to an income attribution rule. In this case, the settlor rather than the trust or spouse must report the income (or loss) derived from the transferred property or the capital gain (or loss) derived from the disposition of the property. For more information, see Trust of Which the Beneficiary Is the Spouse or a Minor and Revocable or Blind Trust.
Since 2016, the following rules have applied to spousal trusts for the taxation year in which the beneficiary dies:
- The trust's taxation year is deemed to end at the end of the day of death, and a new taxation year is deemed to begin at the start of the following day.
- The trust's income for the year is taxable in the trust's income tax return. However, the income can be taxable in the deceased beneficiary's income tax return if the following conditions are met:
- The beneficiary was resident in Canada immediately before the death.
- The trust was, immediately before the death, a testamentary trust that is a post-1971 spousal trust established by the will of a taxpayer who died before 2017.
- The trust and the legal representative who is administering the graduated rate estate (GRE) have made a joint election, using the prescribed form, to have the trust's income for the year be deemed payable to the beneficiary who died in that year. The election form must be enclosed with the individual's income tax return for the year of death and the income tax return of the trust for the given year.
- The deadline for paying the trust's income tax and filing its income tax return and RL-16 slips is the 90th day of the year following the calendar year during which the trust taxation year ended.
The trust and the beneficiary are solidarily liable for the portion of income tax that the beneficiary must pay when the trust's income is included in the calculation of the beneficiary's income for his or her taxation year.
You must check box 28 of the Trust Income Tax Return (TP-646-V) if the trust is a spousal trust and the beneficiary of the trust died in the taxation year concerned. You must also enter the date of the beneficiary's death.
A trust may cease to be considered a spousal trust if:
- another beneficiary receives or otherwise obtains enjoyment of all or part of the trust's income or capital during the lifetime of the spouse; or
- the benefits to the spouse are changed or cease to be granted.