Can a Spousal Trust Hold the Family Home in Ontario?

Many people want their spouse to be able to stay in the family home for life, while keeping control over who ends up with it afterward. A spousal trust created in a will is one way people try to do this. The home sits in the trust, and the surviving spouse benefits from it.

A trust that holds a house raises practical questions. Who can live there, who pays for repairs and taxes, and what happens on the tax side? This article explains the general rules for spousal trusts and where the answers depend on how the will is written.

What makes a trust a spousal trust

A testamentary spouse trust is created by a will. For it to qualify for the tax treatment people are usually after, the spouse must be entitled to all the income arising before death, and no one but the spouse may receive or use any income or capital during the spouse's lifetime.

The second condition matters a great deal for a home. If the will lets children or anyone else use the property or its proceeds while the spouse is alive, the trust may not meet the test. Wording that looks harmless can cause this problem, which is why the drafting deserves care.

Living in the home and who controls the income

For tax purposes, the rules on income are strict. A trust whose terms let the trustee restrict income payments to the spouse does not qualify, and discretion over income must rest solely with the spouse. That means you cannot give the trustee full power to withhold income from the spouse and still expect spousal trust treatment.

How a right to live in the home fits into these income rules depends on how the will describes it. The details are a drafting question that a lawyer and an accountant should confirm together, because a clause that protects the home but cuts across the income rules could cause tax problems.

Upkeep, taxes and who pays

A house costs money to keep: property tax, insurance, repairs and utilities. The will should say where that money comes from, whether from other trust assets, from the income the spouse is entitled to, or from somewhere else. If the trust holds only the house and nothing else, the spouse may have to cover costs personally.

Questions to settle in the will include:

• Whether the trust holds other assets, such as investments, to pay carrying costs.
• Who decides on major repairs or on selling the home if the spouse moves into care.
• Who the trustee is and what happens if the trustee can no longer act.
• What happens to the home or the sale proceeds when the spouse dies.

The rules on trustee duties and on whether a spouse can also serve as trustee depend on the facts and the will, so ask a lawyer to confirm them for your situation.

Tax filings and the principal residence question

A T3 trust return, slips and summaries are due no later than 90 days after the trust's tax year-end, and any balance owing is due then too. T3 slips go to beneficiaries within the same 90 days.

Spousal trust income that is not payable to the spouse is taxed in the trust. Income that becomes payable to the spouse is included in the spouse's income for the year, even if the spouse keeps it, unless an election under section 104(13.1) is made.

Whether the principal residence exemption can apply when a trust owns the home, and who may be treated as living there, depends on detailed tax rules and on the facts. Do not assume the home will be sheltered from tax on a later sale. Ask an accountant to review this before you finalize the will.

What to do next

• List the property you want in the trust, including the home and anything to pay for its upkeep.
• Decide who you want as trustee and a back-up trustee.
• Write down what should happen to the home when your spouse dies or moves out.
• Ask a lawyer to draft the will so the spouse is entitled to all income and no one else benefits during the spouse's life.
• Ask an accountant to review principal residence and T3 filing questions.
• Review the plan if your family or finances change.

If you are married, family law and estate law can both affect what your spouse is entitled to, so mention any separation, marriage contract or earlier relationship when you meet with your lawyer.

Frequently asked questions