Spousal or Common-law Partner Trusts
A rollover is allowed for property transferred to this type of trust. Generally, the trust must meet the following criteria:
- The trust is resident in Canada;
- Your spouse (or common-law partner) is a beneficiary of the trust;
- During the lifetime of your spouse, your spouse is entitled to all of the income of the trust and no one else may receive or use the capital of the trust. However, the trust can provide that your children or other beneficiaries are entitled to income or capital after your spouse’s death; and
- If the trust is created upon your death – e.g. under your will – the property must “vest indefeasibly” in the trust within 36 months of your death or such longer time as the CRA may allow. “Vest indefeasibly” generally means that the trust becomes the owner of the property without any outstanding conditions.
On your spouse’s death, the trust will have a deemed disposition of its properties at fair market value, which will trigger any accrued capital gains and capital losses. This may result in a tax liability for the trust at that time.
Joint Spousal or Common-law Partner Trusts
The criteria are similar to those described above, except that you and your spouse are joint-beneficiaries of the trust. The requirements relating to entitlement to income and use of capital apply to both you and your spouse during your lifetimes, until the later of your deaths. The deemed disposition also takes place at the later of your deaths.
Furthermore, you must be at least 65 years old at the time of the transfer to the trust.
Alter Ego Trusts
Again, the criteria are similar, except that you are a beneficiary of the trust. The entitlement to income and use of capital requirements apply to you while you are alive. The deemed disposition takes place upon your death.
You must be at least 65 at the time of the transfer to the trust.
Further Restrictions
Of course, the good news regarding the above trusts is the tax-free rollover. However, there are some restrictions that can lead to bad news.
For example, if the trust pays any income to a beneficiary other than the lifetime beneficiary described above (you and / or your spouse, as the case may be), while the lifetime beneficiary is alive, the payment is not deductible for the trust even though it is included in the other beneficiary’s income. This will lead to double taxation, since both the trust and the other beneficiary will be taxed on the income.
If the trust distributes property to the lifetime beneficiary, the distribution is usually tax-free. However, if the property is distributed to another beneficiary while the lifetime beneficiary is alive, it is deemed to have been sold at fair market value.