My client's will leaves the residue to a trust for the surviving spouse. What does it need to qualify for the 70(6) rollover, and can we fix it if the will taints it?
In 2026, a spousal trust gets the 70(6) rollover at death if the will creates it, the deceased and trust are Canadian residents, the spouse is entitled to all income for life, nobody else can receive income or capital before the spouse dies, and property vests within 36 months. The gains are taxed in the trust when the spouse dies.
What does a will trust need to get the 70(6) rollover?
Five conditions, all in 70(6). The deceased was resident in Canada immediately before death. The trust was created by the will and is resident in Canada immediately after the property vests in it. The spouse or common law partner is entitled to receive all the income of the trust that arises before the spouse's death. No person except the spouse can, before the spouse's death, receive or otherwise obtain the use of any income or capital of the trust. And the property vests indefeasibly in the trust within 36 months after the death, or a longer period the Minister allows on written application laws-lois.justice.gc.ca.
| Condition | What fails it | Where |
|---|---|---|
| Deceased resident in Canada immediately before death | Death while a nonresident | 70(6) |
| Trust created by the will | A trust varied later by agreement of the beneficiaries | 70(6)(b), Folio 1.15 |
| Trust resident in Canada after vesting | Trust resident outside Canada right after the property vests | 70(6)(b) |
| Spouse entitled to all the income | Trustee discretion to withhold income, or income capped at a percentage of the trust's value | 70(6)(b)(i), Folio 1.30, 1.31 |
| No one else gets income or capital while the spouse lives | Any power to encroach for the children, insurance premiums on the spouse's life | 70(6)(b)(ii), Folio 1.26, 1.33 |
| Vests indefeasibly within 36 months | Estate still unsettled at 36 months with no extension | 70(6) |
When it works, each property passes at the deceased's cost: adjusted cost base for capital property, and the lesser of capital cost and cost amount for depreciable property, so recapture waits too. The trust takes the property at that same amount laws-lois.justice.gc.ca. The rollover runs property by property, and the trust has to receive the same property the deceased owned. If the executor sells the shares and puts the cash in the trust, the cash is substituted property and the shares were taxed at death
canada.ca. The same deemed sale rules for property held personally are on the deemed disposition at death page.
Which will clauses taint the trust, and which can 70(7) cure?
A trust that fails the test is called tainted, and none of its property gets the rollover. The CRA says the mere existence of a power to encroach for someone other than the spouse is enough canada.ca. Whether you can still save it depends on what the offending clause pays.
| Clause in the will or trust | Taints the trust? | Fix |
|---|---|---|
| Trustee may pay capital or income to the children while the spouse is alive | Yes | None after death; 70(7) does not reach it |
| Trust pays premiums on a policy insuring the spouse's life | Yes | None |
| Trustee may hold back income, or the spouse gets a fixed percentage | Yes | None |
| Trust pays another beneficiary's bequest, or tops up another trust under the same will | Yes | None |
| Trust pays the deceased's debts, funeral costs, executor fees or income tax on the final return | Yes | 70(7) election, listing property worth the nonqualifying debts |
| Trust pays a mortgage secured on property the deceased owned | Yes, it's a testamentary debt | 70(7) election; the mortgage is excluded from nonqualifying debts, so nothing is listed for it |
| Trust pays debts owed to the spouse, or its own trustee fees | No | Not needed |
| Trust pays estate or inheritance duties, or tax on its own income | No | Not needed (108(4)) |
| Spouse, former spouse or child lives in a home the trust owns as its principal residence | No | Not needed (108(4)) |
The "None" rows come from the Folio: the CRA says obligations like another trust's shortfall, another trust's trustee fees and another beneficiary's bequest can't be cured under 70(7), and a variation agreed among the beneficiaries doesn't qualify because the trust must meet the test under the will's original terms canada.ca. The exception is a court order under provincial dependants' relief law, which is treated as part of the will. The duty, tax and housing rows are subsection 108(4), which says no one is treated as receiving trust income or capital solely because of those payments or that occupancy
laws-lois.justice.gc.ca.
How does the 70(7) election untaint the trust? A worked example
Subsection 70(7) lets the legal representative treat the trust as a 70(6) trust even though it must pay testamentary debts. The representative elects in the deceased's regular final return, not a return under 70(2), 104(23), 128(2)(e) or 150(4), and lists trust property, other than a NISA, whose fair market value immediately after death is at least the nonqualifying debts. Nonqualifying debts are the testamentary debts minus estate duties on trust property and debts secured by a mortgage on property the deceased owned. The listed property is deemed sold at fair market value on the final return, and everything else rolls over laws-lois.justice.gc.ca.
Your Ontario client dies on March 10, 2026. The will leaves the residue to a trust for the spouse but directs the trustees to pay all debts, funeral costs and taxes out of it first. The trust receives 90,000 fund units worth $900,000 (ACB $540,000), a cottage worth $600,000 (ACB $200,000) and $80,000 of cash. Funeral costs, an unsecured line of credit and the tax on the final return come to $70,000 of nonqualifying debts.
| Line | No election (tainted) | 70(7): list $70,000 of cash | 70(7): list 7,000 fund units ($70,000) |
|---|---|---|---|
| Fund units deemed sold at FMV | All 90,000 | None | 7,000 |
| Cottage deemed sold at FMV | Yes | No, rolls over | No, rolls over |
| Capital gain on the final return | $760,000 | $0 | $28,000 |
| Taxable capital gain at one half | $380,000 | $0 | $14,000 |
| Federal tax on that gain alone, 2026 brackets | $99,376.05 | $0 | Depends on other income |
| Trust's cost of the cottage | $600,000 | $200,000 | $200,000 |
The tainted column taxes the $360,000 fund gain and the $400,000 cottage gain on one return. The $99,376.05 runs $380,000 through the 2026 federal brackets before credits, with the slice above $258,482 at 33% canada.ca. Money can be listed, and you don't have to sell the listed property to pay the debts
canada.ca, so listing cash costs nothing here. If the listed property is worth more than the debts, the representative can designate one listed capital property that isn't money or depreciable property and shrink its gain in proportion
laws-lois.justice.gc.ca.
Two timing rules help. When a trust can be untainted, 70(7)(a) moves the final return due date to 18 months after death laws-lois.justice.gc.ca, so September 10, 2027 in this example. The CRA charges interest on any unpaid balance from the later of six months after death and April 30 of the following year
canada.ca, here April 30, 2027. If you underestimate the debts, the CRA generally lets you list more property later.
Who pays tax on the trust's income while the spouse is alive?
The spouse, for the income. The spouse must be entitled to all of it, so it is payable to the spouse, deducted by the trust under 104(6) and reported on the spouse's own return laws-lois.justice.gc.ca. Taxable capital gains that the trust terms don't make payable to the spouse, and that aren't allocated with a preferred beneficiary election, stay in the trust and are taxed there
canada.ca.
Tax kept in the trust is at a flat rate. A spousal trust can't be a graduated rate estate, because only an estate can canada.ca, so 122(1) taxes its retained income at the highest individual percentage
laws-lois.justice.gc.ca: 33% federally for 2026. The trust tax rate page has the provincial rates. File the T3 under trust type code 905 for a testamentary spousal or common law partner trust
canada.ca.
What happens when the surviving spouse dies?
The deferral ends. As the day of the spouse's death closes, the trust is deemed to dispose of its capital property and land inventory at fair market value and reacquire it at that value, under 104(4)(a) laws-lois.justice.gc.ca. Report it on Form T1055, the summary of deemed dispositions for trusts
canada.ca. The trust's next deemed disposition day is 21 years later, as the 21 year rule page sets out.
| Rule | What it does at the spouse's death | Provision |
|---|---|---|
| Year end | The trust's taxation year ends with the day of death; a new year starts the next day | 104(13.4)(a) |
| Who reports the gains | The trust, unless the will is from a testator who died before 2017 and the joint election is filed | 104(13.4)(b), (b.1) |
| No deduction for other beneficiaries | Deemed gains can't be deducted as payable to the children in that year | 104(6)(b) |
| Federal rate | 33% flat on the taxable gains | 122(1) |
| Minimum tax | Doesn't apply for the year that includes the death | 127.55(e) |
| T3 due date | 90 days after the end of the calendar year of the death | 104(13.4)(c) |
The 2017 line matters. Under 104(13.4)(b.1), the trust and the spouse's graduated rate estate can jointly elect to put the gains on the spouse's final return only if the spouse was resident in Canada and the trust was created by the will of a taxpayer who died before 2017 laws-lois.justice.gc.ca. For a client who dies in 2026, the gains on the spouse's later death stay in the trust at 33% federally, even if the spouse's final return has room in the low brackets. Minimum tax is off for that year under 127.55(e)
laws-lois.justice.gc.ca, as the alternative minimum tax page notes.
That flat rate is a reason to think about which property goes where. Under 70(6.2) the legal representative can elect, property by property, to have 70(5) apply instead, so the trust takes that property at fair market value laws-lois.justice.gc.ca. It pays when the deceased's final return has unused losses or low brackets to absorb the gain. The trust holds the higher cost and less gain is taxed at 33% later. The alter ego trust page runs the same flat rate arithmetic for a living settlor.
Sources
Can a court variation fix a tainted spousal trust?
No. The CRA says a variation agreed among the beneficiaries, even under variation of trusts legislation, doesn't bring the trust within 70(6), because it must qualify under the will's original terms canada.ca. A trust created by a court order under provincial dependants' relief law is the exception: it's treated as created by the will.
Can a client set up a spousal trust while alive?
Yes. Under 73(1) and 73(1.01)(c)(i), property moves at cost to a trust where the spouse gets all the income before death and no one else can receive income or capital, if the client and the trust are resident in Canada at the transfer laws-lois.justice.gc.ca. It files under trust type code 322
canada.ca. Income on the transferred property can still come back to the client under the spousal attribution rules.
What if the property can't vest in the trust within 36 months?
Ask for more time in writing before the 36 months run out. The CRA says to send the request to the tax services office before the period ends canada.ca, and 70(6) allows a longer period the Minister considers reasonable on written application
laws-lois.justice.gc.ca.
Does the rollover still go on the final return?
Yes. The disposition still goes on Schedule 3 of the final return, with proceeds equal to the adjusted cost base so the gain is zero canada.ca. The final return page has the other lines. The trust's cost is the deceased's cost, which is where its own gain will be measured.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.