Canada: The Mismatch: More Inequity From The New Trust And Estate Rules

Last Updated: December 2 2014
Article by Ross Cammalleri

In our September 5, 2014, Tax Alert edition, we illustrated the lack of fairness in the recently proposed amendments to the taxation of trusts and estates with respect to disabled Canadians. As tax practitioners examine the details of the proposed amendments, more concerns are being raised and more inequities found.

Consider the impact the new rules will have on testamentary spousal trusts, along with certain other trusts, such as spousal/common law partner trusts, joint partner trusts, and alter ego trusts – collectively hereinafter referred to as special life interest trusts.

For example, a deceased individual may establish a special life interest trust for the benefit of their spouse pursuant to their will. Such testamentary spousal trusts are common today for many reasons. First, they permit the deferral of tax that would otherwise be payable from the disposition of assets beneficially owned by the deceased, deemed to occur immediately before death. In addition, a special life interest trust can preserve capital of the deceased – upon the death of the deceased's spouse, the assets of such trust will pass to the deceased's children. This type of planning is more common today as family dynamics have changed and more households have children from more than one marriage.

Under our current income tax rules, at the time of the death of a deceased's spouse, the special life interest trust is deemed to dispose of its assets at fair market value. As a result, capital gains relating to the trust's assets may be realized. Currently, the trust is liable for the tax resulting from such a notional sale. Accordingly, there is a matching of the tax liability to the taxpayer – in this case the special life interest trust that owns the property for which the capital gain was triggered.

Under the new proposed trust and estate rules, the special life interest trust will be deemed to have a year-end at the end of the day of death of the spouse, and all of the trust's income, including any resulting capital gains for that short year, will be deemed payable to the beneficiary spouse. As a result, any capital gains realized on the trust's assets from the notional sale must be reported on the beneficiary spouse's terminal return. Consequently, it will be the spouse's estate and not the special life interest trust that will bear the cost of the income tax liability that arises from the deemed disposition of the assets. 

If the beneficiaries of the special life interest trust are the same as the beneficiaries of the spouse's estate, this new rule may be of little practical significance. However, as noted earlier, there are more and more individuals with children from past marriages who will want to leave property to those children. Difficulties will arise where the spouse's estate has no entitlement to the assets of the trust. Accordingly, there will be an enrichment of the beneficiaries of the trust since the tax liability will be borne by the spouse's estate.

Where the spouse's estate does not have the resources to settle the tax liability that is deemed payable to the spouse, the new rules propose to impose a joint and several liability on both the spouse's estate and the special life interest trust to ensure that the taxes will be paid. However, under the proposed new rules, the tax itself is not assessed to the special life interest trust. Furthermore, the new joint and several liability rule does not provide for the reimbursement by the trust to the estate for the tax liability relating to assets that the estate does not own. Hence, there is a mismatch with respect to the person paying the tax and the owner of the assets that gave rise to the tax. As such, an inequity results to the spouse's estate.

The special life interest trust could distribute property to the spouse's estate to make it whole, but in many instances the trustees of such a trust may not be in position to do so without breaching the terms of the trust. 

The Joint Committee on Taxation of the Canadian Bar Association and the Chartered Professional Accountants of Canada has noted this inequity, along with other concerns with the proposed new rules, to the Department of Finance. The Joint Committee has recommended amendments to the new rules so that the taxes otherwise payable as a result of the deemed disposition will first be assessed to the special life interest trust, which allows the trust to use its assets to settle the tax liability. Furthermore, the Joint Committee has recommended rules that will allow for the spouse's estate to recover the taxes it is required to pay from the trust. Notwithstanding these recommendations, the Department of Finance has not yet amended the new rules. In addition, these new rules do not provide for any grandfathering provisions. As a result, the terms of existing special life interest trusts should be reviewed to consider the impact of the proposed amendments.

Despite some of the inequities that will arise if the new rules are passed into law, special life interest trusts will continue to provide benefits that merit consideration. Benefits include avoiding probate taxes, creditor protection, and the preservation of capital in the case of spendthrift beneficiaries and for children in blended families. Thus, taxpayers and their advisors still should consider these special life interest trusts when formulating estate plans.

Unless amendments are made to the new trust and estate rules, advisors should caution their clients. In situations where the spouse must include income realized by the trust, advisors should include provisions in the terms of special life interest trust agreements that will require the trustees to distribute property to a spouse's estate to make it whole. Moreover, advisors should consider the possibility of disposing of the assets held by the trust during the lifetime of the beneficiary spouse in order to minimize the capital gains that will be triggered at the time of the beneficiary's death.

While we wait for a response from the Department of Finance, taxpayers and their advisors will have one more thing to consider in the already complex estate planning world. Contact your Collins Barrow advisor for more information and guidance on these new trust and estate rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Ross Cammalleri
In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.