17 June 2025 STEP Roundtable Q. 7, 2025-1054921C6 - Subsection 70(6) and Testamentary Spousal Trust

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1) Where a formal conveyance of the residue of an estate to a separate trust has not yet occurred, can the assets forming the residue be considered to have been transferred to a spousal trust for the purposes of subsection 70(6); 2) Has a separate trust been created for the purposes of the Act; 3) Provided the estate administration is complete and the residue is determined within three years of the taxpayer's death, will the assets that the taxpayer had on death which became part of the residue be deemed to be disposed of pursuant to subsection 70(6); 4) What are the consequences if the administration of an estate takes more than three years such that the assets which form the residue cannot be identified until after three years from the date of death?

Position: 1) & 3) Question of fact and law; 2) An estate and each trust created by the will of a taxpayer are separate taxable entities for the purposes of the Act and each will have their own filing requirements; 4) If the conditions of subsection 70(6) are not met, subsection 70(5) will apply. To the extent than an estate continues beyond a period of 36 months it will no longer be a graduated rate estate. If it cannot be shown that the residue has vested indefeasibly in the spousal trust within 36 months of the taxpayer’s death, a written application for an extension can be made within that period to the Minister.

Reasons: See below.

2025 STEP CRA Roundtable – June 17, 2025

QUESTION 7 - Subsection 70(6) and Testamentary Spousal Trust

A taxpayer dies with a will that contains the following provision in connection with the residue of the estate:

To hold and keep the residue of my estate (the “Residue”) invested and to pay the net income derived therefrom to or for the benefit of my spouse, provided that my Trustees may at any time or times pay to or for the benefit of my said spouse such amount or amounts out of the capital of the Residue of my estate as my Trustees in their absolute discretion deem advisable, it being understood that during my spouse's lifetime my spouse is entitled to receive all of the income of the Residue and that no person except my spouse may receive or otherwise obtain the use of any of the income or capital of the Residue, my intention being that the Residue constitute a spousal trust as described in paragraph 70(6)(b) of the Income Tax Act (Canada).

1. Where a formal conveyance of the Residue from the estate of the deceased to a separate trust has not yet occurred, does the CRA consider that the assets forming the Residue have been “transferred to” a spousal trust for the purposes of subsection 70(6)?

2. Does the CRA agree that the above provision results in a separate trust for the purposes of the Act?

3. Does the CRA agree that provided the estate administration has been completed and the assets forming the Residue are determined within 3 years of the taxpayer’s death, that the assets of the taxpayer on death that become part of the Residue will be deemed disposed by the taxpayer for proceeds equal to their cost pursuant to subsection 70(6)?

4. What are the consequences if the administration of the estate takes more than 3 years from the time of the taxpayer’s death such that the Residue is not known until after 3 years from the taxpayer’s death?

CRA Response

Part 1.

When a taxpayer dies, subsection 70(5) provides for a deemed disposition of each capital property of the taxpayer immediately before the death. This could result in taxable capital gains, allowable capital losses, recapture of capital cost allowance, or terminal losses. Where subsection 70(6) is applicable, these tax implications can generally be deferred.

Subsection 70(6) applies where capital property of a deceased taxpayer who was resident in Canada immediately before the taxpayer’s death is, as a consequence of the death, transferred or distributed, inter alia, to a trust created by the taxpayer’s will (referred to herein as a “testamentary spousal trust”), that was resident in Canada immediately after the time the property vested indefeasibly in the trust, and under which:

• the taxpayer’s spouse or common law partner is entitled to receive all of the income of the trust that arises before their death; and
• no person except the spouse or common law partner may, before their death, receive or otherwise obtain the use of any of the income or capital of the trust.

In addition, the property must, generally, become vested indefeasibly in the trust within 36 months after the death of the taxpayer.

Where subsection 248(8) applies in respect of a testamentary spousal trust, it provides that a property is considered to have been transferred or distributed to the trust as a consequence of a taxpayer’s death, when the transfer or distribution was under or as a consequence of the terms of the will or other testamentary instrument of the taxpayer, or as a consequence of the law governing the intestacy of the taxpayer.

In considering the meaning of “transfer or distribute”, the Federal Court of Appeal (FCA) in The Queen v. Boger Estate (93 DTC 5276) concluded that a formal conveyance was not necessary to “transfer or distribute” the property in question. The language of subsection 70(6) includes the passing of property under the terms of a valid will.

Accordingly, the absence of a formal conveyance of the Residue to the testamentary spousal trust would not, by itself, preclude the Residue from being transferred or distributed for the purposes of subsection 70(6). However, whether property has been “transferred or distributed” for the purposes of subsection 70(6) is a question of fact and law that will depend on the applicable provincial law, and the particular facts and circumstances of each case, including the terms of the will. In common law provinces and territories, reference to the applicable provincial law includes the common law and relevant provincial or territorial statutes.

In addressing the distinction between trusts and estates, Ian Pryor and Grace Chow in the Practitioner's Guide to Trusts, Estates and Trust Returns, 2024 edition, offer the following guidance in respect of the residue of an estate in common law provinces and territories:

The personal representative of an estate takes title to the property of the deceased and is obliged to handle that property with many of the same duties of good faith that attach to a trustee, but the division of ownership which is one of the hallmarks of a trust relationship is absent. The beneficiary of a trust holds the equitable title to the property of the trust while the trustee holds the legal title. The beneficiary of an estate however does not, as a rule, enjoy a beneficial interest in the assets while they are under administration and form part of the estate.

The timing of the shift in equitable ownership can be important. Generally, residuary beneficiaries do not enjoy beneficial ownership in the assets comprising the residue until the debts are ascertained and paid, allowing the residue to be known, and not in specific items of property in the residue until those items are “allocated” or earmarked for the beneficiary. Equitable ownership may pass sooner in the case of a specific bequest or where the whole of the residue is due to a single beneficiary. Where a statute applies to a specific situation and is held to provide for immediate or early vesting then the statute will govern.

Part 2.

For subsection 70(6) to apply to a trust, that trust must be created by a taxpayer’s will. In this regard, subsection 248(9.1) provides that, for the purposes of the Act, a trust shall be considered to be created by a taxpayer’s will if the trust is created under the terms of the taxpayer’s will or by an order of a court in relation to the taxpayer’s estate made under any law of a province that provides for the relief or support of dependants. Accordingly, in order to meet the requirements of subsection 70(6), the testamentary spousal trust would need to be created pursuant to the terms of the taxpayer’s will (or by a court order as described above) and would be separate from the estate.

Whether a valid trust is created is a question of fact and law which is dependent on the applicable provincial law, and the particular facts and circumstances of each case, including the terms of the will.

It is our view that an estate and each trust created by the will of a taxpayer are separate taxable entities for purposes of the Act and each will have their own filing requirements under the Act.

Part 3.

In addition to other specific conditions that must be satisfied for subsection 70(6) to apply to a trust referred to in paragraph 70(6)(b), as outlined in our response to Part 1., the capital property transferred or distributed to the testamentary spousal trust must vest indefeasibly in the trust within 36 months of the death of the taxpayer or, upon written application within that period, within such longer period as the Minister considers reasonable in the circumstances.

The Act does not define the term vested indefeasibly. Accordingly, its meaning must be construed within the context of the provisions where it is used. For the purposes of subsection 70(6), vested indefeasibly refers to the unassailable right to ownership of a particular property that, as a consequence of the death of the owner, has been transferred to a spouse or common-law partner or testamentary spousal trust of the deceased.

In considering the interpretation of the expression indefeasible vesting, the FCA in Boger approved the trial judge’s statement of the determinative legal principles that vesting occurs where:

(i) there is no condition precedent to be fulfilled before the gift can take effect; and

(ii) the persons entitled (the children) are ascertained and ready to take possession forthwith, there being no prior interests in existence;

and that a vested interest is indefeasible where there is no condition subsequent or a determinable limitation set out in the grant.

A property can vest indefeasibly in a beneficiary even if the title has not yet been transferred via a legal conveyance or by registration if, for example, there is a specific, non-contingent and uncontested bequest to a spouse or common-law partner after the death of the taxpayer, and if it is clear that there are sufficient assets available in the estate to allow for the distribution of the specific bequest. In respect of the residue of an estate, generally, only once the residue is clarified and the beneficiaries have an enforceable right to the property can the assets thereof vest in the beneficiaries.

Whether the Residue can be considered to vest indefeasibly in the testamentary spousal trust for the purposes of subsection 70(6) is a question of fact and law that can only be determined following a review of the applicable provincial law, facts and circumstances, including the will.

Also note that paragraph 248(9.2)(a) will deem property not to have vested indefeasibly in a testamentary spousal trust, unless the property vested indefeasibly in the trust before the death of the spouse or common-law partner.

Part 4.

As noted in our response to Part 3., in addition to other specific conditions that must be satisfied for subsection 70(6) to apply, the capital property transferred or distributed to the testamentary spousal trust must vest indefeasibly in the trust within 36 months of the death of the taxpayer or, upon written application within that period, within such longer period as the Minister considers reasonable in the circumstances.

If this condition, or any other condition in subsection 70(6) is not met, subsection 70(6) would not be applicable and subsection 70(5) would apply.

In addition, pursuant to the definition of “graduated rate estate” (“GRE”) in subsection 248(1), an estate cannot be a GRE for more than 36 months after the death of the taxpayer. Accordingly, to the extent that an estate continues beyond 36 months, it would no longer be a GRE and the estate will be deemed to have a year end immediately before that time pursuant to subsection 249(4.1).

As noted above, if it cannot be shown that the Residue has vested indefeasibly in the testamentary spousal trust within 36 months of the taxpayer’s death, a written application can be made to the Minister by the taxpayer’s legal representative within that period to request an extension. See Question 14 of the 2023 STEP CRA Roundtable (CRA Document #2023-0967371C6) for guidance in respect of an application to extend the 36 month period.

Other income tax consequences may be applicable depending on the facts of a particular situation. Accordingly, the comments provided above are of a very general nature and do not represent an exhaustive list.

Dawn Dannehl
2025-105492