5 October 2012 Roundtable, 2012-0453941C6 F - Principal residence owned by a trust-exemption
Principal Issues: A residence is owned by a personal trust. Three sets of assumptions are described with respect to the beneficiaries of the trust and with respect to the person inhabiting the house.
1) The first issue concerns the determination of the persons who are the specified beneficiaries for the purposes of the designation provided for in paragraph (c.1) of the definition of principal residence in section 54.
2) The second issue concerns the impact of the designation (that is made by a personal trust) of a residence as a principal residence on the possibility by a specified beneficiary to claim the principal residence exemption with respect to his own residence.
3) The third issue is whether a renunciation by specified beneficiaries to their capital or income rights under the trust (that would be done immediately before the sale of the residence by the personal trust) would allow them to claim their own principal residence exemption.
Position: 1) A specified beneficiary is described in subparagraph (c.1)(ii) of the definition of principal residence in section 54. Without the review of the trust deed in a particular situation and without the complete information on the persons who may inhabit the residence owned by the trust rent-free, no definitive conclusion can be reached with respect to the specified beneficiaries. Subsection 248(25) provides an inclusive definition of "beneficially interested".
2) Where a trust designates its residence as a principal residence for a particular year (assuming that the conditions to do so are met in that particular year), that residence will be deemed to have been property designated by each specified beneficiary of the trust for the calendar year ending in the particular year and the specified beneficiaries of the trust will not be allowed to designate another residence in that calendar year.
3) The renunciation would have to be legally valid. However, if the renunciation takes effect immediately before the sale of the residence by the personal trust, that renunciation would not allow a specified beneficiary to designate another residence in the previous calendar years assuming that the personal trust has designated a residence for those previous years. In our view, to make a designation with respect to a particular year, the conditions of the designation have to be met in that particular year.
Reasons: In compliance with the provisions of the Act.
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2012
2012 APFF CONFERENCE
Question 3
Ownership of a principal residence by a trust
Situation 1. A principal residence is held by a personal trust whose beneficiaries are the parents and their children. The parents live in the residence and the children each have a different principal residence.
Situation 2. Same situation as above, but this time only one of the children lives in the residence.
Situation 3. A principal residence is held by a personal trust whose sole beneficiaries are the children. One of the children lives in the residence. The parents have a different principal residence, as do the other children.
Under subparagraph 54(c.1)(ii), a "specified beneficiary" is a beneficiary who is beneficially interested in the trust, and ordinarily inhabited the housing unit or has a spouse or common-law partner, former spouse or common-law partner or child who ordinarily inhabited the housing unit. The residence is then deemed to be the principal residence of each beneficiary of the trust who qualifies as a "specified beneficiary".
Questions to the CRA
(a) Who are the specified beneficiaries in each of the above situations?
(b) In the context of the trust's sale of the residence, we accordingly understand that each of the specified beneficiaries identified in (a) will have their principal residence exemption affected in each of the years in which the trust held the residence so designated.
(c) Could the other specified beneficiaries renounce their beneficial interest in the trust immediately prior to the sale and thus not be affected by the exemption claimed by the trust?
CRA Response
Response to Question (a)
The term "specified beneficiary" is defined in subparagraph (c.1)(ii) of the definition of "principal residence" in section 54 (the "Definition"). We understand that the situations described above are situations in which the trust designated the property other than by the effect of paragraph (b) of the Definition. In this case, the term "specified beneficiary" refers to a person who, in the calendar year ending in the year:
- On the one hand, is beneficially interested in the trust, and
- On the other hand, ordinarily inhabited the housing unit or has a spouse or common-law partner, former spouse or common-law partner or child who ordinarily inhabited the housing unit.
Subsection 248(25) indicates, inter alia, that among the persons who are beneficially interested in a trust are persons who have any right (whether immediate or future, whether absolute or contingent or whether conditional on or subject to the exercise of any discretion by any person or partnership) as a beneficiary under a trust to receive any of the income or capital of the particular trust either directly from the particular trust or indirectly through one or more trusts or partnerships.
In the absence of the trust deed and in the absence of details of who may live in the residence without paying rent, it is not possible to definitively identify all persons who are beneficially interested in the trust or all persons who would be specified beneficiaries. For example, in Situation 3, the parents could be beneficially interested if the trust deed provided that upon the death of a child holding an interest in the capital of the trust, that interest would pass to the child’s legal heirs if the child did not have a will and if the parents were included as the child’s legal heirs. It could be the same for the spouse of a child. These would then be specified beneficiaries.
If, after reviewing all of the relevant information in the particular situation, the CRA concluded that the only persons beneficially interested in the trust are those listed in the situations described above, the specified beneficiaries would be the following:
- in Situation 1, the parents.
- in Situation 2, the parents and the child who ordinarily inhabited the residence.
- in Situation 3, the child who ordinarily inhabited the residence.
Response to Question (b)
The calculation provided in paragraph 40(2)(b) (i.e., the calculation of the reduction in the gain from the disposition of a residence) is based on the number of taxation years for which a residence has been designated as a principal residence by its owner in accordance with the provisions listed in the Definition. If the personal trust is the owner of the residence, it will have to consider for each year of ownership whether it meets the conditions to designate the residence as principal residence for that year and whether it wishes to designate it as such for that year of ownership. Among these conditions, there is the one in subparagraph (c.1)(iv) of the Definition that prevents a trust from designating the residence that it holds as principal residence for a year where certain persons listed in that subparagraph have designated a property as their principal residence for that year.
In accordance with paragraph (f) of the Definition, where a personal trust satisfies the conditions for designation and designates for one year a residence as the principal residence of the personal trust for the year, that residence shall be deemed to be designated as principal residence by each specified beneficiary of the trust for the calendar year ending in the year. The specified beneficiary cannot therefore designate another for the calendar year in question. If the personal trust does not designate the residence as a principal residence for a particular year even if owns the residence, then the specified beneficiaries will not be affected by the presumption in paragraph (f) for the calendar year ending during this year.
Response to Question (c)
For the purpose of the calculation provided under paragraph 40(2)(b), it is necessary to determine, for each year in which a personal trust owns a residence, whether the residence is a principal residence for that year. As a result, a review of the conditions for the personal trust to be able to designate the residence as a principal residence for a year is based on the state of affairs during that year. For example, in subparagraph (c.1)(ii) of the Definition, specified beneficiaries are those described in clauses (A) and (B) of this subparagraph in the calendar year ending in such year.
Similarly, if a personal trust designates a residence as a principal residence for a particular year, it is the specified beneficiaries in the calendar year ending in the particular year that will be affected by paragraph (f) of the Definition and who will have the consequences for that calendar year ending in the year.
Consequently, a (legally valid) renunciation by certain beneficiaries in respect of their beneficiary rights in the trust that would be made immediately prior to the sale of the residence by the personal trust and that would be effective only from that time would not avoid the consequences provided for in paragraph (f) of the Definition.
Response prepared by: Sylvie Labarre
(613) 946-5357
2012-045394