Written on May 10, 2013 – 7:00 am | by Steven Frye
Mr M has settled an irrevocable trust which qualifies as a joint spousal trust (or common-law partner trusts) pursuant to the applicable sections of the Income Tax Act governing trusts. The main beneficiaries of the trust are Mr. M and Mrs. W, both of whom are Canadian residents. The trust stipulates while either Mr. M or Mrs. W is alive, no one other Mr. M or Mrs. W may receive any of the capital or income of the trust.
What happens if Mr. M and Mrs. M obtain a divorce: Does the trust continue for tax purposes upon divorce? The good news is that the Canada Revenue Agency has confirmed that the trust does continue for tax purposes, in the same way a spousal trust continues after divorce or annulment. Deemed disposition of the trust would only apply on the later of the death of Mr. M and Mrs. W.
If you are in a jurisdiction where an equalization payment payable to Mr. M or Mrs. W is based on the relative value of assets and liabilities of each party at date of marriage and date of separation, this is particularly good news as the trust does not automacaly need to be wound up (although it may be for equalization purposes). In jurisdictions where spouses are required to actually split their assets and liabilities, some creativity will be needed to keep the trust in place but at least the taxing authority will not get in the way if the trust is left untouched.
Thanks for reading.