Spousal Trusts in Ontario: How They Work and Who Qualifies

If you have heard the term spousal trust, it was probably in a conversation about a will. Someone may have suggested that instead of leaving everything to your spouse outright, you leave it in a trust that looks after them for life. It is a common tool when a person has children from an earlier relationship.

This article explains what a spousal trust is in plain terms, the conditions the Income Tax Act sets for one to qualify, and why blended families often choose it. It is general information for Ontario, not advice on your own will.

What a spousal trust is

A trust is an arrangement where a person called a trustee holds and manages property for the benefit of someone else. In a spousal trust, the person who benefits during their lifetime is the surviving spouse or common-law partner of the person who died.

For tax purposes, the term used is a testamentary spouse or common-law partner trust. The word testamentary matters: a qualifying spousal trust must be created by the deceased's will. How a trust set up separately while you are alive is treated is a different question, so it is worth confirming with a lawyer or accountant.

The conditions to qualify

Not every trust for a spouse gets spousal trust treatment. The Canada Revenue Agency's guidance sets out conditions that cover how the trust is created, who can benefit from it, and when the property must be locked in.

• The trust must be created by the deceased's will.
• The surviving spouse must be entitled to all of the trust income that arises before their death.
• No one other than the surviving spouse may receive or use any of the trust income or capital during the spouse's lifetime.
• For the tax rollover, the property must be locked in, which the guidance calls vesting indefeasibly, for the trust no later than 36 months after the death.

A written request to extend the 36-month period can be made to the Tax Services Office before the 36 months end. If a trust does not meet the conditions, it does not get the rollover. A cure under section 70(7) is available only where the problem is testamentary debts. In practice, the wording of the will is what decides this, so the drafting deserves care.

Why blended families use them

In a blended family, the main worry is often that property left outright to a new spouse can end up going to that spouse's own relatives instead of the deceased's children. A spousal trust can address this. The surviving spouse has the benefit of the income, and the will can name who receives what remains afterward.

There is also a tax reason. Property that passes to a qualifying spousal trust can be moved on at the deceased's adjusted cost base, so the capital gain on the final return is zero. The tax is deferred, not erased: the trust is deemed to dispose of its capital property at the end of the day the beneficiary spouse dies.

Whether a spousal trust suits your family depends on the size of the estate, how the assets are held, and how much control you want to keep over the final beneficiaries. A lawyer can walk through those choices with you.

How it fits with a surviving spouse's other rights

A married survivor is not limited to what the will gives. They can claim half the difference in net family property under the Family Law Act, take what the will gives, or, if there is no will, take their share under the Succession Law Reform Act. To claim equalization, they must file the Election of Surviving Spouse form with the Estate Registrar for Ontario no later than six months from the death.

If no election is filed, the survivor is deemed to take under the will or intestacy. If they elect equalization, gifts to them in the will are deemed revoked unless the will expressly says the gifts are in addition. Whether that affects an interest in a trust depends on how the will is written, so ask before assuming.

A dependant can also ask the court for support out of the estate if the deceased did not make adequate provision for their proper support, with or without a will. A six-month limitation period applies to that kind of claim. How a spousal trust interacts with a claim like this depends on your situation and the wording of the will, so it is worth confirming with a lawyer.

What to do next

• List your family members, including children from earlier relationships, and who you want to benefit and in what order.
• Gather a summary of your main assets, such as the home, investments and registered plans.
• Ask a lawyer whether the wording in your will meets the spousal trust conditions.
• Ask an accountant how the trust fits your overall tax picture.
• Review the will after a marriage, separation or new child.

Frequently asked questions