A housing unit is subject to a usufruct created by the Quebec will of Mr. X, with Mr. X’s surviving spouse (Ms. X) being the usufructuary, and their child being the bare owner. Ms. X ordinarily inhabits the housing unit.
CRA indicated that the death of the usufructuary would terminate the usufruct and the deemed trust that had arisen under s. 248(3), which would imply the distribution of the housing unit to the bare owner. Upon the termination of the deemed trust, since the distribution of the property by the deemed trust (referred to in s. 104(4)(a)(i)), would be made to a beneficiary other than the surviving spouse, s. 107(4) would apply to the distribution, so that s. 107(2.1) would result in realization of a capital gain by the deemed trust. The sale of the residence could also generate a capital gain to the deemed trust. However, the deemed trust, a personal trust, could claim the principal residence exemption under s. 40(2)(b), provided that the conditions for the property to qualify as a “principal residence” were met. In this regard, CRA stated:
Since Ms. X would be beneficially interested in the trust under paragraph 248(3)(d), she could be considered a specified beneficiary as defined in subparagraph (c.1)(ii) of the definition of "principal residence" in section 54 to the extent that she ordinarily inhabited the residence during the years the deemed trust owned it by virtue of subsection 248(3). That would allow the deemed trust to designate the residence as its principal residence, provided that all the other conditions of the definition of "principal residence" in section 54 were also satisfied.
Regarding what would be the consequences of Ms. X surrendering her usufruct, CRA noted that such surrender would terminate the deemed trust and result in the distribution of the deemed trust’s property to the bare owner. Ss. 107(2.1) and (4) would apply to this distribution. However:
As in the case where the termination of the deemed trust resulted from the death of the usufructuary, and given that the deemed trust would be a personal trust, it would be possible for the deemed trust in this situation to claim the principal residence exemption under paragraph 40(2)(b) to reduce the capital gain realized as a result of the termination of the usufruct, provided that the conditions of the definition "principal residence" in section 54 were all satisfied in respect of the residence.