Colleen Ma, in Canadian Tax Focus 4:3 (August, 2014) summarizes some issues with spousal trusts:
- A non-eligible beneficiary can disclaim a beneficial interest to “purify” the trust so that it will qualify as a spousal trust.
- If a spousal trust is constituted by the residue of an estate, then the estate can receive dividends on shares forming part of the estate during the executor’s year to pay expenses of the estate or other amounts that do not benefit the spouse without tainting the spousal trust.
- A spousal trust cannot pay premiums on a life insurance policy where anyone other than the spouse will benefit under the policy.
- The trustees of a spousal trust will need a power to encroach on capital to pay capital dividends to the spouse-beneficiary.
- On the other hand, a power to encroach will make it impossible to claim a donation receipt for the residual interest in the spouse trust that was donated to a charity.
- A pre-emptive right in a shareholder agreement to acquire the shares of a shareholder upon her death might prevent the shares from vesting indefeasibly in a spousal trust within the requisite three-year period after the death of the shareholder.
