Suppose the will of a deceased taxpayer provides that certain assets are to be transferred to a spousal or common law partner trust. Before doing so, and while property of the estate is being administered, certain property might change or be substituted by the Estate. For example, shares might be converted from one class to another. If so, is the spousal rollover still available?
When a taxpayer dies and certain conditions are met, property held by the deceased immediately before the death, may be transferred to a spousal or common law partner trust a tax-deferred “rollover” basis. The rule provides that the property has vested indefeasibly with the spousal trust within 36 months of the taxpayer’s death.
In a technical interpretation, the Canada Revenue Agency provided that the spousal rollover applies on a property-by-property basis, and the spousal trust must receive the same property that has been deemed to have been disposed by the deceased immediately prior to his or her death. Substituted property transferred to the spousal trust would not qualify for the spousal rollover as the relevant rule does not refer to substituted property.
It follows from the above that if the terminal tax return was previously filed on the basis that the spousal rollover was applicable to the specific property then the terminal tax return of the deceased should be amended to include any applicable capital gain or loss.
Executors and personal representatives need to keep this in mind in the post mortem period when reorganizations may produce unintended results.