What Is a Spousal Trust in an Ontario Estate? Rights and Tax

A spousal trust is a trust set up in a will for a surviving spouse. Instead of receiving the assets outright, the spouse benefits from the trust while a trustee holds and manages the property.

If you are named as a beneficiary, you may want to know what you are entitled to, whether you have a choice, and how the tax rules work. This article covers the main points.

What makes a trust a spousal trust

For tax purposes, a trust created by the will qualifies for special treatment only if specific conditions are met. The spouse must be entitled to all of the trust's income, and no one else can receive or use its income or capital during the spouse's lifetime.

The trust must be resident in Canada and the property must vest indefeasibly within 36 months after death. If the conditions are not met, the tax benefit may be lost, so the exact wording of the will matters.

Your choices as a surviving married spouse

When a married spouse dies, the surviving spouse is entitled to one-half of the difference between the spouses' net family properties, if the deceased's was the greater. The surviving spouse must elect either to take under the will or to receive the equalization entitlement.

If you elect equalization, the gifts to you in the will are revoked, unless the will expressly says they are in addition to the equalization entitlement. That can include a spousal trust, so get advice before choosing.

The election (Form 1, Election of Surviving Spouse) must be filed with the Estate Registrar for Ontario within six months after the death. If no election is filed in time, you are deemed to have elected to take under the will, unless the court orders otherwise on application.

Equalization is available only to married spouses. The wider definition that includes unmarried cohabitants applies only to support.

How the tax rules work

At death, a taxpayer is deemed to dispose of each capital property immediately before death for proceeds equal to its fair market value. That deemed disposition is deferred if the property passes to a spouse or common-law partner resident in Canada, or to a Canadian-resident trust created by the will that meets the spousal trust conditions.

The deferral is not permanent. A spousal or common-law partner trust is deemed to dispose of its capital property at fair market value on the day the spouse dies, while other trusts face a deemed disposition every 21 years.

A trust may deduct income that became payable to its beneficiaries in the year, so that income is taxed to the beneficiary rather than the trust. An accountant can explain how this applies to your trust.

The trustee's role and your rights

A trustee must invest trust property with the care, skill, diligence and judgment of a prudent investor. No Ontario law requires an estate trustee to pass accounts at fixed intervals, but the court can compel it at the request of a person with an interest, such as a beneficiary.

If you were an unmarried partner, you have no share of an intestate estate. You may still apply for dependant support if the deceased did not make adequate provision for your support, where you cohabited for at least three years or in a relationship of some permanence and are the parent of a child.

What to do next

• Get a copy of the will and read the trust terms carefully
• Note the date of death and the six-month election deadline
• Ask an accountant how the trust will be taxed
• Ask the trustee for regular information about the trust property
• Speak with a lawyer before electing or signing any consent

Frequently asked questions