Anonymised, illustrative composite. A $4.1-million block of holding-company shares, a spousal trust drafted to include the children as well as the widow, and a deferral that is all-or-nothing rather than pro-rated.
At a glance
The founder of a family manufacturing business died owning 61% of the voting shares of its holding company through his estate, appraised at roughly $4.1 million at the date of death. His will, drafted a decade earlier by a general-practice lawyer rather than an estates specialist, left that block to a trust described as being “for the benefit of my wife and my children, in such proportions as my trustees in their discretion see fit.” The family's account of the intent afterward was straightforward: give the widow security for life, keep the shares inside one vehicle rather than splitting them at death, and let the children eventually inherit through the same trust without a second probate on her death.
ITA s.70(5) deems a taxpayer to have disposed of every capital property immediately before death at fair market value — ordinarily the trigger for the accrued gain on private-company shares. s.70(6) defers that gain where the property is transferred or distributed, within 36 months of death, to the surviving spouse outright or to a trust created by the will under which “the taxpayer's spouse or common-law partner is entitled to receive all of the income of the trust that arises before the spouse's or common-law partner's death” and “no person except the spouse or common-law partner may, before the spouse's or common-law partner's death, receive or otherwise obtain the use of any of the income or capital of the trust.”
This trust met the first condition — the widow was entitled to all of the trust's income for her life — but not the second. Because the trustees held discretion to pay capital, and income beyond what the widow drew, to the children while she was still alive, the trust could not satisfy the “no person except the spouse” wording. The two conditions are conjunctive on the face of the subsection, so meeting one and missing the other is the same as meeting neither.
The block's adjusted cost base was approximately $1.25 million against the $4.1 million appraised value, for an accrued gain near $2.85 million. Full deferral under s.70(6) would have pushed the entire gain, and the tax on it, out to the widow's own death or an earlier disposition of the shares. Losing the deferral instead triggered a taxable capital gain on the deceased's terminal T1, adding roughly $640,000 of combined federal and Ontario tax to the estate's first return — due on the estate's ordinary filing and payment schedule rather than deferred for a generation.
Nothing in s.70(6) makes the deferral proportionate to how much of the trust actually benefits the spouse. The subsection asks whether the trust, as drafted, permits anyone but the spouse to touch income or capital before the spouse's death — a yes/no question about the terms of the instrument, not a measurement of what the children were likely to receive in practice. A trust that would, on the facts, have paid the widow 95% of everything still fails if the deed gives the trustees the power to pay the children 5% while she is alive. The rollover is binary because the test is about entitlement under the trust deed, not about probable outcomes.
The comparison that shows the mechanism most clearly is the outright bequest. Leaving the shares directly to the widow, rather than into any trust, satisfies s.70(6) as long as the property “has become vested indefeasibly in the spouse” within the 36-month window — a lower bar than the trust route, because there is no second beneficiary class to police. The estate here chose the trust structure specifically to keep control away from an outright bequest; that same choice is what exposed it to the drafting error.
The estate paid the additional tax from the holding company's retained cash, delaying a planned equipment purchase by roughly a year. The will could not be corrected after death — s.70(6) is tested against the trust as it actually reads, not as the family says it was meant to read — so the deferral, once lost, was lost for this transfer permanently. The family did use the episode to redraft the shareholders' agreement and a fresh set of wills for the surviving generation, this time with a standalone spousal trust and a separate discretionary trust for the children funded from other assets.
Had the will used a clean spousal trust — income and capital to the widow alone during her life, with the children entitled only on her death — the entire $640,000 tax bill would have been deferred to her death or an earlier sale, freeing that cash to stay in the business. The redraft that fixes this prospectively costs a few thousand dollars in legal fees; discovering the defect after death costs whatever the accrued gain happens to be.
Any trust clause naming beneficiaries other than the spouse for income or capital, however discretionary or however small a share, breaks s.70(6) — even if a family lawyer's plain-language read of the will suggests the spouse was clearly meant to come first. The subsection has to be checked against its own two conditions literally, not against the drafter's evident intent. “For my wife and my children” is exactly the phrase that fails; “for my wife during her lifetime, and thereafter for my children” is the phrase that passes.
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