- A spousal trust rollover lets the deceased be treated as disposing of property at adjusted cost base instead of fair market value, but only if strict conditions are met.
- For a spousal trust, the deemed disposition of trust capital happens on the spouse's death, not at the 21-year mark that applies to other trusts.
- Alberta trustees must act impartially between the spouse and the other beneficiaries, and the T3 return is due 90 days after the trust's year-end.
A will sometimes leaves property to a trust for a surviving spouse or partner instead of to the person directly. The spouse enjoys the income, and what is left goes to other people, often children, after the spouse dies. If you are the spouse, the trustee or a beneficiary waiting for the remainder, it helps to know how this arrangement is treated once the estate is being administered.
This article explains the main federal tax conditions, how Alberta's Trustee Act affects the trustee, and the tax filing basics. It does not cover how to draft a will. Your own situation will turn on the exact wording of the will and the facts, so a lawyer or accountant should confirm the details.
This article covers the law of Alberta.
What a spousal trust is and when it counts for tax
For tax purposes, a testamentary trust is one that arose on and as a consequence of an individual's death, and a trust created by a will generally fits that description. A spousal or common-law partner trust must pay the surviving spouse or partner all of its income during their lifetime. That person must also be the only one who can receive its income or capital while alive.
A testamentary trust can be treated as an inter vivos trust for tax purposes if it takes on certain debts owed to non-arm's-length parties, although some debts are excluded. If the trust borrows from family members or related companies, ask an accountant before it does.
The rollover: ACB instead of fair market value
Normally a person who dies is treated as having sold their property at fair market value. Under the spousal trust rollover in section 70(6) of the Income Tax Act, property passing on death to a spouse, a common-law partner or a will-created trust that qualifies can instead be treated as disposed of at its adjusted cost base. That defers the tax.
The rollover has conditions:
- The spouse must be entitled to all of the trust income arising before their death.
- No one else may receive or use the trust's income or capital before the spouse's death.
- The property must be shown to have vested indefeasibly in the spouse or the trust within 36 months after death, or a longer period the Minister considers reasonable on written request.
- The spouse or the trust must be resident in Canada.
If the trust allows capital to be paid to someone other than the spouse during the spouse's life, the rollover may be lost. This is a reason to review the trust wording with a lawyer before the estate is distributed.
When tax is eventually paid
The rollover defers tax; it does not remove it. For a spousal trust, the deemed disposition of trust capital property at fair market value happens on the death of the spouse or common-law partner. Other trusts face a deemed disposition 21 years after they are created.
How the tax on growth in the property is handled when the spouse dies, and who ends up bearing it, depends on the will and the facts. Planning for that point, including whether the trust will have cash on hand, is worth raising with an accountant.
Spouse, common-law partner or adult interdependent partner
The tax rules and Alberta's family-law concepts use different tests. For federal tax, a common-law partner is someone who has cohabited in a conjugal relationship for a 12-month period.
Under Alberta's Adult Interdependent Relationships Act, a person is an adult interdependent partner if they have lived with the other in a relationship of interdependence for a continuous period of at least 3 years, or if there is a child of the relationship and it is a relationship of some permanence, or if they signed an adult interdependent partner agreement under section 7. People related by blood or adoption can become adult interdependent partners only by entering that agreement.
| Test | Federal tax (common-law partner) | Alberta adult interdependent partner |
|---|---|---|
| Time living together | 12-month period of conjugal cohabitation | 3 years continuous, or a child and some permanence |
| By agreement | Not the test described | Agreement under section 7 |
| Related by blood or adoption | Not the test described | Agreement under section 7 only |
Which test matters depends on the question being asked. If your relationship does not fit neatly, get advice before assuming the trust qualifies.
The trustee's duties under Alberta's Trustee Act
Alberta's current Trustee Act, SA 2022, c T-8.1, was proclaimed in force on February 1, 2023, and replaced the former Act. The Act applies to trusts created before, on or after the date its section 2 came into force. A will can override the Act in many cases, but some rules cannot be overridden.
A spousal trust sets two groups against each other: the spouse wants income, and the remainder beneficiaries want the capital protected and grown. The Act keeps the trustee's duty to act impartially between classes of beneficiaries, and investment planning must consider that impartiality. Trustees must also invest prudently, aiming for a reasonable return while avoiding undue risk, and review investments periodically.
The Act contains rules on paying income and capital, but sections 42 and 46 say certain spousal and alter ego trusts are outside the income/capital and distributive-power rules unless the trust instrument expressly provides otherwise. Whether your trust is one of them depends on the Act's definitions and the will, so confirm it with a lawyer.
Trustees generally must also report to qualified beneficiaries within 2 months after the end of each fiscal period. A qualified beneficiary includes one with a vested beneficial interest in the trust property.
Tax filing and what to do next
A T3 return is due no later than 90 days after the trust's tax year-end, and any balance owing is due in the same 90 days. A trust other than a graduated rate estate or qualified disability trust pays tax at the highest individual percentage on its taxable amount. A trust can deduct income that became payable to a beneficiary in the year, and the beneficiary includes it in income.
- Get a copy of the will and read the trust wording on income and capital.
- Confirm whether the spouse or partner qualifies under the tax and Alberta tests.
- Diarize the 36-month vesting date from the date of death.
- Confirm Canadian residency of the spouse or trust.
- Plan with an accountant for the T3 return, which is due 90 days after the trust's tax year-end.
- Keep records of investments, payments and expenses so reports to beneficiaries can be made.
Frequently asked questions
Does a spousal trust avoid tax completely?
No. The rollover defers tax by treating the deceased as disposing of property at adjusted cost base. Tax on trust capital property is generally triggered by a deemed disposition at fair market value on the spouse's death.
Can the trust pay capital to the children while the spouse is alive?
For the tax rollover, no one other than the spouse may receive or use trust income or capital before the spouse's death. A trust that allows this may not qualify, so have the wording reviewed.
How is the trust taxed each year?
A trust that is not a graduated rate estate or qualified disability trust pays tax at the highest individual percentage on its taxable amount. Income that became payable to a beneficiary can be deducted by the trust and is included in the beneficiary's income.
What if the trustee favours the spouse or the children?
The trustee must act impartially between classes of beneficiaries. A trustee or beneficiary can apply to the court to determine whether the trustee has failed to perform a duty, and the court may order performance or remove the trustee.
Sources
- Income Tax Act, s. 108(1) (Justice Laws) — Justice Laws (federal)
- CRA – Trust types and codes — canada.ca
- CRA – When to file a trust's T3 return — canada.ca
- Trustee Act, SA 2022, c T-8.1, ss. 1(p), 2 (King's Printer) — kings-printer.alberta.ca
- Income Tax Act, s. 70(6) — Justice Laws (federal)
- Income Tax Act, s. 104(4) — Justice Laws (federal)
- Income Tax Act, s. 122(1); CRA trust types — Justice Laws (federal)
- Adult Interdependent Relationships Act, s. 3 — kings-printer.alberta.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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