October 7, 2015
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A qualified spousal trust entitles the surviving spouse to all of the income of the trust until his or her death. Before the surviving spouse’s death, no one else may receive or otherwise obtain the use of any of the income or capital of the trust. A qualified spousal trust is created by the testator’s Will or by a court order in connection with dependent’s support relief legislation related to the deceased’s estate.

Generally, this type of trust is used when a person wants to provide the assets and income to the spouse for their lifetime. Upon the death of the spouse, the assets and income will go to the children.

Previously, a qualified spousal trust was taxed as an ordinary tax payer at a graduated rate. As of January 1, 2016, this will change due to Bill C-43 receiving Royal Assent.

Bill C-43 will affect qualified spousal trusts by changing the tax rate. As of January 1, 2016 they will be subject to taxation at the highest marginal tax rate, rather than a graduated rate.

How will this affect future estates?

This will impact Estate Administrators when a Will allows for the option of a qualified spousal trust to be set up. Under Bill C-43, the estate will have three years from date of death to wind up any potential qualified spousal trusts, prior to it being taxed at the highest marginal tax rate. Therefore, there may remain a tax benefit to setting up the qualified spousal trust for three years at the graduated tax rate, before the highest marginal tax rate takes effect. The Estate Administrator should consult with a chartered accountant to ensure if any tax advantages remain in the setting up of a spousal trust.

How will this affect current Qualified Spousal Trusts?

Given that qualified spousal trusts will now be taxed at the highest marginal rate, any potential tax savings that might have been realized may be lost. If you are currently a Trustee of a qualified spousal trust, you should contact your accountant to discuss the tax advantages or disadvantages.

How will this affect a Will that sets up a qualified spousal trust?

Setting up the option for a qualified spousal trust may still be beneficial for your surviving spouse. The administrator of your estate will have a three-year option from the date of your death to set up the trust. As indicated above, the Estate Administrator should consult with a chartered accountant prior to setting up a qualified spousal trust to ensure that all tax advantages are being considered.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.