The estate of Deceased Parent, that qualified as a graduated rate estate (GRE) with a fiscal period of July 1, 2016 to June 30, 2017, sold the principal residence of the Deceased Parent in 2017 during that fiscal period at a gain. The adult son lived in the home during 2017 before the sale and was a specified beneficiary of the GRE as described in the principal residence definition. The correspondent suggested that the new limitation in s. (c.1)(iii) of the principal residence definition did not apply in this situation since the disposition did not occur in a taxation year that began after 2016, so that the GRE could designate the residence as a principal residence for its July 1, 2016 to June 30, 2017 taxation year. CRA responded:
[T]he GRE:
1. would not be, in its first taxation year after 2016, a trust described in proposed subparagraph (c.1)(iii.1) of the definition principal residence in section 54;
2. owned the property on December 31, 2016;
3. disposed of the property after 2016;
4. first disposed of the property after 2016; and
5. owned the property continuously from the beginning of 2017 until the disposition.
Given that new subsection 40(6.1) would therefore apply to the GRE described above, we do not agree with your interpretation. …[T]he transitional relief offered by proposed subsection 40(6.1) would be applicable in the scenario presented to any portion of the … gain that accrued up to December 31, 2016. Any portion of the gain that accrued after that date would not be eligible to be sheltered by the principal residence exemption and would be taxable.