Estate Plans Involving Trusts Require Review
Subsections 104(13.4) and 160(1.4) (enacted on December 16, 2014 and
applicable to the 2016 and subsequent taxation years) complicate and
delay the administration and distribution of estate and trust assets.
The subsections have the potential to derail current estate plans that
use spouse trusts, alter ego trusts, and joint partner trusts.
Subsection 104(13.4) deems trust income arising from the death of an
individual—for example, the spouse in a spouse trust, or a similar
income beneficiary of an alter ego trust or a joint partner trust—to
become payable in the year to that individual. Where this subsection
deems an amount to be payable to an individual, and thus taxed in the
hands of the individual’s estate, the individual and the trust are
jointly and severally liable for the taxes payable up to that amount
under subsection 160(1.4).
To understand how these provisions create a problem and how the
problem can be solved, consider a situation involving a second marriage.
Assume that Husband and Wife have both been married before and both
have children from the previous marriages. Husband wants to provide for
Wife after his death, but he wants his children to ultimately receive
the bulk of his estate. Husband’s will sets up a spouse trust under the
rollover provisions in subsection 70(6), naming Wife as income
beneficiary and Husband’s children as capital beneficiaries. Wife’s will
is different: under it, she simply leaves all of her estate to her
children. Assume that Husband dies first and that Wife dies a few years
Under the current tax provisions, on the death of Wife, there will be
a deemed disposition at fair market value of all the capital property
in the spouse trust. Any resulting tax liability will be paid using the
assets in the spouse trust; the remainder will be available for
distribution to Husband’s children.
Starting in the 2016 taxation year, on the death of Wife, there will
still be a deemed disposition at fair market value of all of the capital
property in the spouse trust, but any resulting tax liability will be
paid by Wife’s estate (subsection 104(13.4)), not by the spouse trust.
Consequently, all the assets in the spouse trust will be available for
distribution to Husband’s children.
The problem is that a full distribution of the trust’s assets cannot
happen until the spouse trust trustee is sure that Wife’s estate has
paid the tax liability arising from the operation of subsection
104(13.4); if such a payment did not occur, there could be a need to
hold back the funds required to pay a liability under subsection
160(1.4). However, the trustee for the spouse trust cannot pay the tax
owing because that would be a breach of his or her duties as a trustee
(to preserve the assets for the benefit of the trust’s beneficiaries).
Paying the tax effectively takes money from the beneficiaries (Husband’s
children) and uses it to benefit someone else (Wife’s children).
The estate executor could consider obtaining a clearance certificate
from the CRA certifying that the estate has satisfied all of its tax
liabilities, but providing the certificate to the spouse trust trustee
could constitute a breach of confidentiality. Further, the spouse trust
trustee would not be able to make a successful Privacy Act request to
determine whether a clearance certificate had been issued without the
authorization of the estate executor.
This problem can be solved simply by amending the two wills, provided
that Husband and Wife are still alive and mentally competent. After
Husband’s death, however, a court order will be required. Since a court
will have to weigh the interests of different parties against one
another, the outcome is uncertain.
Colleen D. Ma
Dunphy LLP, Calgary