Death of a beneficiary of a spousal or similar trust

Notice to the reader 

This measure has received Royal Assent.

Changes proposed and released for consultation by the Department of Finance on January 15, 2016 ensure that income arising in certain trusts upon the death of the trust’s primary beneficiary would be taxed in the trust and not in the hands of the deceased beneficiary. However a joint election could be made for certain testamentary trusts to report the income in the deceased beneficiary’s final tax return.

1. What are the current special rules applicable to the 2016 and subsequent taxation years related to the death of a beneficiary of a spousal or similar trust?

Special rules were introduced in Budget 2014 (which have received Royal Assent) for the trusts described below and the individuals whose death triggers a deemed disposition day, applicable to the 2016 and subsequent taxation years. Under these rules, a deemed disposition day is: 

  • for a spousal or common-law partner trust, the day the beneficiary spouse or common-law partner died;

  • for a joint spousal or common-law partner trust, the day the settlor or the beneficiary spouse or common-law partner died, whichever is later;

  • for an alter ego trust, the day the settlor died; and

  • for a trust to which any property was transferred on a rollover basis, by an individual (other than a trust) where the transfer did not result in a change in beneficial ownership of that property and no person (other than the individual) has any absolute or contingent right as a beneficiary under the trust, the day on which the individual died.

Under the current rules, applicable for the 2016 and subsequent taxation years:

  • the trust’s tax year is deemed to have ended at the end of the deemed disposition day;

  • a new taxation year and fiscal period for the trust are deemed to begin at the start of the following day;

  • the trust’s income for the tax year that ends on the deemed disposition day is deemed to have become payable to the deceased beneficiary with the result that the income is to be included in computing income for the deceased beneficiary’s final tax return;

  • the trust’s income for the tax year that ends on the deemed disposition day is also deemed not to have become payable to any other beneficiary, with the result that those other beneficiaries will not be required to include any part of the trust’s income in computing their incomes, and no amounts may be designated by the trust for the year in respect of any beneficiary other than the deceased beneficiary;

  • the filing-due date for the trust’s tax return for the tax year that ends on the deemed disposition day and to issue its T3 information slips in respect of that year, is the day that is 90 days after the calendar year in which the tax year ends. The trust’s balance-due day for the year is also extended to that day.

2. What changes are proposed for spousal or similar trusts?

For 2016 and subsequent years, it is proposed that for spousal and common-law partner trusts and similar trusts, where the primary beneficiary dies, the income that is deemed to be recognized upon the death will be taxed in the trust.

However, in the case of a testamentary spousal or common law partner trust, it is proposed that a joint election with the graduated rate estate of the trust’s deceased primary beneficiary will be available for the income to be taxed in the final return of the deceased beneficiary where the following conditions are met:

  • the deceased beneficiary is resident in Canada immediately before the death;

  • the trust is immediately before that death a testamentary trust that is a post-1971 spousal or common-law partner trust;

  • the trust was created by the will of a taxpayer who died before 2017;

  • the trust and the beneficiary’s graduated rate estate jointly elect to have the income included in the deceased beneficiary’s final tax return; and

  • the T3 income tax return of the trust for the particular year, and the T1 income tax return of the deceased beneficiary for the individual’s year of death, both include a copy of the joint election, which will contain the beneficiary’s Social Insurance Number and the trust’s tax account number (the identifier that starts with the letter “T”).
3. What changes are proposed for donations made by a spousal or similar trust where the beneficiary dies after 2015?

It is proposed that, when calculating a charitable donation tax credit, a spousal or similar trust could allocate donations that are made by the trust to the trust’s taxation year in which the beneficiary dies, provided the donations are made within 90 days after the end of the calendar year in which the beneficiary dies.

4. When an election is made under the proposed new rules (see Question 2), what are the joint liability rules related to the tax payable associated with the income inclusion on the deceased beneficiary’s final income tax return?

The trust and the deceased individual are jointly and severally, or solidarily, liable for the portion of the deceased individual’s tax payable under Part I because of the income inclusion described above  (i.e., the trust’s income for the year that ends on the deemed disposition date, is included in the deceased individual’s income). As a result, a joint liability assessment can be raised for the trust in respect of the tax payable by the deceased.

When the tax return for the deceased is filed, if the deceased individual’s tax liability, if any, relating to the income inclusion has not been paid, the trust can expect action to be taken by the CRA, through the issuance of a joint liability assessment, to collect that outstanding liability directly from the trust.

The deceased’s legal representative (e.g., estate trustee) remains, to the extent provided under the Income Tax Act, jointly and severally, or solidarily, liable with the deceased for amounts payable (including that portion of the tax payable under Part I) by the deceased under the Act.

5. Where can I get more information about this change?

The CRA is committed to providing taxpayers with up-to-date information. The CRA encourages taxpayers to check its webpages often. All new forms, policies, and guidelines will be posted as they become available.

In the meantime, please consult the Department of Finance News Release.

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