Canada: Welcome Changes To New Life-Interest Trust Rules

In January 2016, the Department of Finance released draft legislation proposing amendments to the new life-interest trust1 rules, which came into effect for 2016 and subsequent tax years. As noted in our November 2014 release, Surprise legislation impacts estate planning, the new rules could adversely affect common estate planning strategies and, consequently, have been a cause for concern.

The new rules

When a beneficiary of a life-interest trust passes away, the trust is deemed to dispose of its assets at their fair market value. Under the new rules, any capital gains and income recognized as a result of this deemed disposition, as well as any other income earned in the year of the death of a life-interest trust's primary beneficiary, are required to be taxed in the hands of the beneficiary in the deceased's final income tax return, instead of in the trust (as was the case under the previous rules).

Concerns with the new rules

The new rules2 could adversely affect common estate planning strategies for life-interest trusts. For example, post-mortem planning strategies could be negatively impacted where the trust holds private company shares (or other assets with a significant unrealized gain). After the death of the beneficiary spouse, the company is often wound up and its shares are redeemed or cancelled, resulting in a dividend as well as a capital loss on the disposition of the shares. 3 Under the old rules, that capital loss can be applied to offset or reduce the capital gains realized in the trust upon the death of the spouse. Under the new rules, however, this type of planning would no longer work. Instead, double taxation could result, with the capital gain being reported on the deceased beneficiary's final income tax return, and the capital loss being realized by the trust, with no mechanism for applying the loss to offset the gain. 4 Our November 2014 release also provides other examples where planning strategies would be frustrated.

Many existing life-interest trusts have also been established with the intention of having the trust make charitable donations to help offset the capital gain realized on the deemed disposition of the trust property. In the absence of any relieving provisions, the new rules would cause the capital gain to be reported on the beneficiary's terminal tax filing, yet the donations would remain in the trust, essentially limiting access to the tax benefit that would normally be achieved from making charitable donations.

The proposed changes to the new rules

On November 16, 2015, the Department of Finance acknowledged the concerns expressed by the tax community and other stakeholders regarding the new rules. It then proceeded to outline an option which arose in its discussions with the Joint Committee on Tax of the Canadian Bar Association and CPA Canada, as well as other stakeholders, for remedying these concerns. The draft legislation effectively adopts this option.

The draft proposals provide that the rules will be amended so that income deemed to be recognized upon the death of the primary beneficiary will be recognized and taxed in the trust (as per the old rules) unless a post-1971 testamentary spousal or common law partner trust (that arose on and as a consequence of a death before 2017) jointly elects with the primary beneficiary's graduated rate estate5 (GRE) to have this income taxed in the primary beneficiary's final tax return.

The draft legislation also effectively addresses concerns that were expressed about post-mortem donations being trapped in a life-interest trust where such income is taxed in the primary beneficiary's return. In addition to allowing for the income to be taxed in the trust (unless the above-noted joint election is filed), the draft legislation will permit donations made by a life-interest trust after the primary beneficiary's death to be claimed in the trust's deemed tax year-end (that arises on the beneficiary's death), provided that the donation is made no later than 90 days after the end of the calendar year in which the primary beneficiary dies.

Other proposed changes

The draft legislation also allows greater flexibility for recognizing charitable donations made by an individual's estate after it ceases to qualify as a GRE. New rules first announced in the 2014 federal budget, effective for the 2016 and subsequent tax years, facilitate the tax treatment of donations made by a GRE. A GRE can allocate available donations among any of the following: the tax year of the estate in which the donation is made; an earlier tax year of the estate; or the last two tax years of the deceased individual. The draft legislation proposes to extend these rules to apply to donations made by the GRE after it ceases to have that status (because of the expiry of the GRE's 36-month period) for up to 60 months after the individual's death.

All the proposed amendments noted in this release apply to the 2016 and subsequent tax years. Please contact one of our firm's tax practitioners for further details about any of the proposed amendments discussed in this release.


1 Spousal, alter-ego, joint partner and other similar trusts.

2 Included in new subsection 104(13.4) of the Income Tax Act

3 The shares are deemed to be reacquired at their fair market value on the death of the beneficiary, resulting in an increase in their tax cost base.

4 As currently drafted, the rules do not allow the trust to carry back tax losses and apply them to the deceased's final income tax return. The CRA had been asked whether the new rules preclude a strategy whereby a subsequent capital loss of the trust could be carried back to offset the capital gain. The CRA agreed that there were practical issues with the new rules and that it was not clear whether or not a late-filed 104(13.2) election would be possible to offset the gain in the trust before any balance was allocated to the deceased.

5 Where certain conditions are met, an estate arising upon the death of an individual is still subject to graduated tax rates after the 2015 tax year (as opposed to being taxed at the highest marginal tax rate) but only for up to the first 36 months after the individual's death. Once the estate ceases to be a graduated rate estate, it is taxed at the highest marginal tax rate. 

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.

Events from this Firm
3 Nov 2016, Seminar, Toronto, Canada

You're warmly invited to attend our annual, complimentary seminar for charities on Thursday, November 3rd, 2016. Enjoy breakfast with your peers, then glean valuable insights about operating and growing successful charities from industry specialists who will be sharing their expertise and knowledge. Afterwards the presenters will be happy to answer questions, and there'll be plenty of time to connect with other attendees. Be sure to register soon—seats fill quickly!

9 Nov 2016, Seminar, Ontario, Canada

You're warmly invited to attend our annual, complimentary seminar for not-for-profits on Thursday, November 10, 2016. Enjoy breakfast with your peers, then glean valuable insights about operating and growing successful not-for-profits from industry specialists who will be sharing their expertise and knowledge. Afterwards the presenters will be happy to answer questions, and there'll be plenty of time to connect with other attendees. Be sure to register soon—seats fill quickly!

17 Nov 2016, Seminar, Toronto, Canada

You're warmly invited to attend our annual, complimentary seminar for not-for-profits on Thursday, November 17, 2016. Enjoy breakfast with your peers, then glean valuable insights about operating and growing successful not-for-profits from industry specialists who will be sharing their expertise and knowledge. Afterwards the presenters will be happy to answer questions, and there'll be plenty of time to connect with other attendees. Be sure to register soon—seats fill quickly!

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.