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 daughter being the bare owner. Ms. X ordinarily inhabits the housing unit.
The creation of the usufruct would create a deemed (testamentary) trust under s. 248(3), which would qualify as a spousal trust for purposes of the s. 70(6) rollover to such trust of the residence assuming that, under the terms of the will, no person other than Ms. X would be entitled during her lifetime to receive or otherwise obtain the use of any part of the income or capital of the trust.
Regarding the consequences of the death of the usufructuary (which would cause the deemed trust to cease to exist) or the sale of the residence during the life of Ms. X, CRA stated:
At the time the deemed trust ceases to exist, since the distribution of the property, the residence, by the deemed spousal trust (a trust described in subparagraph 104(4)(a)(i)) would be made to a beneficiary other than Mr. X's spouse, subsection 107(4) would apply. That would have the effect of subsection 107(2.1) applying to the distribution of the property held by the trust to the bare owner. By virtue of paragraph 107(2.1)(a), the deemed trust would be deemed to have disposed of the property for proceeds equal to its FMV, and under paragraph 107(2.1)(b), the bare owner would be deemed to have acquired the property at a cost equal to its FMV.
The sale of the residence to a third party who acquired both Ms X's and her daughter's rights would also result in the realization of a capital gain or loss at the level of the deemed trust and would result in the extinction of the trust, since the qualities of usufructuary and bare owner would be combined in the same person, the third party purchaser.
In both of the above situations, a disposition of the residence for its FMV would then be recognized at the trust level, with the result that a capital gain could be realized at the trust level.
Regarding the consequences of the alternative scenario of the bare owner (the daughter) assigning her bare ownership interest in the residence to her mother, the usufructuary (Ms X), or predeceasing her mother, CRA indicated that, pursuant to s. 70(5) or 69(1)(b), the bare owner would be deemed to have received the FMV of the capital interest in the deemed trust on its deemed disposition on her death, or on its assignment to the usufructuary, respectively. Moreover, the assignment to the usufructurary would cause the deemed trust’s termination, so that the housing unit would be distributed to the usufructuary pursuant to s. 107(2).