What is a spousal trust and how does it work in Ontario?
A spousal trust is a trust that holds property for a surviving spouse, and the kind that gets special tax treatment must be created by the deceased's will. To qualify, the surviving spouse must be entitled to all the trust income arising before their death, and no one else may receive or use the trust's income or capital during the spouse's lifetime. How this applies depends on your situation.
The main tax benefit is deferral. If capital property passes to a testamentary spousal trust, the deceased is deemed to sell it at adjusted cost base, so the capital gain on the final return is zero. However, the legal representative can elect in the final return, property by property, to transfer at fair market value instead. The property must be locked in for the spouse or trust no later than 36 months after death.
The trust is deemed to dispose of its capital property at the end of the day the beneficiary spouse dies, and that is when the deferred gain is taxed. A trust that does not meet the conditions does not get the rollover, and the cure under s. 70(7) applies only where the problem is testamentary debts. Have the wording reviewed first.
Key takeaways
- A qualifying spousal trust must be created by the deceased's will.
- The surviving spouse must be entitled to all trust income arising before their death, and no one else may receive or use income or capital during the spouse's lifetime.
- Property moving into a qualifying trust is deemed sold at adjusted cost base, so the final return shows no capital gain, but the property must be locked in within 36 months of death.
- The deferred gain is taxed when the trust is deemed to dispose of its capital property at the end of the day the beneficiary spouse dies.