In December 2014, legislation was passed which significantly
changed the taxation of certain types of testamentary trusts such
as spousal/common law partner trusts, joint partner trusts and
alter ego trusts, more commonly referred to as life interest
trusts.
In our
November 25, 2014 Tax Alert, we outlined how
the rules could result in a mismatch of tax liability to assets.
Essentially, the life interest trust now has a year-end at the end
of the day the surviving spouse (i.e. beneficiary spouse) dies.
Additionally, the new rules treat the life interest trust's
income for the short year as having been paid to the beneficiary
spouse in that year. The result is that the beneficiary spouse has
an income inclusion from the trust, including capital gains
considered to be realized in the trust as a result of the death.
However, the trust maintains ownership of the underlying assets.
This could be problematic where the beneficiaries of the
deceased's estate are different
