The spousal gift
When you pass away, the Canada Revenue Agency (CRA) deems you to have sold
all of your assets immediately prior to your death. To the extent that any
of your assets have a pregnant gain, then your estate will be subject to
capital gains tax. On the bright side of things, at least your
beneficiaries get to inherit your assets with a bumped-up cost base.
There is, however, one important exception to this deemed capital gain. You
can defer your death tax exposure by making your spouse the beneficiary of
your estate, or perhaps better still, you can leave your assets in a
qualifying spousal trust. There is no election that your estate need make;
it’s an automatic deferral to the extent you leave assets to your spouse or
a spousal trust.
Specifically, the tax rules provide that bequests to a spousal trust (or to
your spouse outright) will not trigger capital gains tax on your death, so
that assets transferred to the spousal trust will occur on a tax-deferred
The bonus of a spousal trust is that you can choose trustees to protect the
surviving spouse against poor financial decisions.
As well, you can ensure that the surviving spouse will not be able to
transfer assets to undesired beneficiaries (for example, if he or she were
to get remarried and decide to leave your assets to their new spouse).
But you must be certain that the spousal trust qualifies for the
tax-deferred treatment; otherwise, no tax-deferred rollover upon your death
will be available. Specifically, the spousal trust must meet the following
* The spouse is entitled to receive all of the income of the trust while he
or she is alive.
* No other person (including children) may receive or otherwise obtain the
use of any income or capital of the trust.
Note: Just because no one else is allowed to receive the capital of the
trust does not mean that the spouse is automatically entitled to the
capital. Which means you can provide that there is no power to encroach on
capital, so that the nest egg stays safe for your children, and your spouse
gets the benefit of the income during his or her lifetime. In other words,
as long as no other person receives or obtains the use of the capital, the
spousal trust will not be disqualified.
In order to make sure that you do not stray from these requirements, take
care when drafting your will and the clauses relating to the spousal trust.
For example, if the spousal trust allows for the trustees to lend funds on
an interest-bearing basis to a relative, this could be interpreted as
allowing someone other than the spouse to receive or obtain the use of the
capital. It may be okay, however, to lend funds on commercial terms, but
you should check with your advisor.
Fortunately, a spousal trust can provide for certain testamentary debts to
be paid, i.e., funeral expenses and income taxes payable for the year of
death and prior years.
Before 2014, one of the most important strategies when tax planning your
will was the “testamentary trust,” as such trusts were treated as separate
taxpayers, with access to the graduated rates.
By leaving assets in a testamentary trust for your kids instead of giving
them the assets outright, the children could “income split” with the
estate. This opportunity was even more lucrative because the estate could
choose to declare and pay tax on its income, even though it is actually
paid out to beneficiaries. And the more testamentary trusts you created in
your will, the more you had access to the graduated tax rates. However,
that was then, and this is now.
As of 2016, testamentary trusts no longer benefit from graduated tax rates
(in addition to no longer being exempt from making tax installments or
having an off-calendar year end). As a result, testamentary trusts will now
be subject to a flat top tax rate.
The only exception to this new rule is that the estate can take advantage
of the graduated tax rates for the first 36 months. But after that time
period, there will be no longer any opportunity to income split. Note that
there will continue to be access to graduated rates for testamentary trusts
whose beneficiaries are individuals that are eligible for the federal
Disability Tax Credit.
Income earning assets
There are many other tax-planning strategies that you should bear in mind
when drafting your will. For example, if you own income and
non-income-earning assets, it is possible to leave the income-earning
assets to children with low income. This is because income from bequests to
high-income children will, of course, be added to their other taxable
income, thus resulting in a significant tax exposure.
Probate planning, RRSP and RRIF strategies, and charitable donations.
Samantha Prasad, LL.B., is a Partner with Toronto law firm
Minden Gross LLP, a Meritas Law Firm Worldwide affiliate, and specializes in corporate,
estate, and international tax planning. She writes frequently on tax
issues, and is the co-author of Tax and Family Business Succession Planning, 3rd Edition. She is also co-editor of various
Wolters Kluwer Ltd. tax publications. Portions of this article first appeared in The TaxLetter, © 2017 by
MPL Communications Ltd. Us
ed with permission.
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