All About Estates

Death and TOSI Part 2: Spouses

My past two blogs have looked at the December 13, 2017 draft legislation that amends and expands the tax on split income (“TOSI”) rules. In my last blog I outlined some of the special rules that apply (in the context of TOSI) to income and gains on property that is acquired as a consequence of death.

A further special rule relates specifically to spouses. If an amount qualifies as an “excluded amount” it is not included in an individual’s “split income” and accordingly is not subject to TOSI. Proposed paragraph 120.4(1.1)(c)(ii) of the Income Tax Act contains a relieving provision where an individual’s spouse or common-law partner dies. The rule provides that if an individual has income or a gain in a year and it would have been an excluded amount if it was included in the income of the individual’s deceased spouse or common-law partner, then it is deemed to be an excluded amount in the hands of the surviving spouse or common-law partner.

For example, assume spouse A is 30 years of age and holds shares of a private company. Spouse A has been actively involved in the business on a regular, continuous and substantial basis for the past 6 years, such that the business is an “excluded business” of spouse A. The income from those shares, or taxable capital gain from the disposition of those shares, is therefore an excluded amount for spouse A (see paragraph (e)(ii) of the new definition of “excluded amount”). Assume further that spouse A dies and she leaves the shares to her partner, spouse B. Provided spouse A and spouse B were spouses or common-law partners immediately before spouse A died, the rule above provides that the income from those shares, and any taxable capital gain from the disposition of those shares, will be an excluded amount in the hands of spouse B.

The rule set out above does not contain an age requirement for either the deceased or surviving spouse or common-law partner on its face. However, since an amount will only be deemed to be an excluded amount in the hands of the surviving spouse or common-law partner if it was an excluded amount for the deceased spouse or common-law partner, any age requirements in the definition of excluded amount necessarily apply to the deceased spouse or common-law partner. By contrast, they do not seem to apply to the surviving spouse or common-law partner. For example, if a surviving spouse or common-law partner who is under 25 years of age inherits “excluded shares”, is the income and gain from those shares an excluded amount even though the surviving spouse or common-law partner has not reached the required age? On its face the rule described above does not require the surviving spouse or common-law partner to have attained age 25, but in addition the deeming rules I discussed in my prior blog could also apply to this scenario. Specifically, if the surviving spouse or common-law partner (or any individual who is 18 years or older) acquires excluded shares as a consequence of death, the spouse or common-law partner (or other individual who is 18 years of age or older) is deemed to have attained 24 years of age before that year, thereby meeting the age requirement (see proposed paragraph 120.4(1.1)(b)(iii)).

Of course, I would be remiss if I omitted one very important point this particular February. Go Team Canada !!

About Darren Lund
Darren Lund is a member of the Trust, Wills, Estates and Charities at Fasken, Toronto office. Darren has expertise in a broad range of estate planning matters, including multiple wills, inter vivos trusts, disability planning, estate freezing, and planning for beneficiaries and assets outside Canada. Darren advises trustees and beneficiaries on all aspects of estate administration, both contentious and non-contentious, and his experience includes passing of fiduciary accounts, trust variations, post-mortem tax planning, and administering the Canadian estates of non-residents. He also speaks and writes on a variety of related topics such as estate planning for spouses and couples, inheriting overseas property and estate planning for persons with disabilities. He previously practised estates law at a large national law firm. Email: dlund@fasken.com

0 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *