Review Trusts Holding Principal Residences Before End of 2016

According to draft legislation released on October 3, 2016, only certain qualifying trusts will be able to claim a principal residence exemption on dispositions occurring after 2016. Taxpayers whose principal residence is held by a non-qualifying trust should review their structures before the end of 2016. If a tax-deferred rollout of the property is contemplated, it may be desirable to have that happen before the new year. Where possible, consideration can be given to resettling the property on one of the qualifying trusts described below.

Under existing legislation, a trust can claim the principal residence exemption in respect of a qualified dwelling if certain eligibility criteria are met. In general, this requires that
  1. the trust properly designate the property as its principal residence on form T1079 (“Designation of a Property as a Principal Residence by a Personal Trust”), which includes identifying each “specified beneficiary” (generally, a beneficiary who ordinarily inhabited the property, or whose current or former spouse or common-law partner or child ordinarily inhabited the property) of the trust, and

  2. no partnership or corporation (excluding registered charities) be beneficially interested in the trust at any time in the year.

Once made, the designation essentially precludes the beneficiaries (and their spouses and minor children) from claiming a principal residence exemption of their own for the years in which the trust claimed the exemption.

Proposed subparagraph (c.1)(iii.1) of the definition of “principal residence” in section 54 provides that for dispositions occurring after 2016, a trust will be entitled to designate a qualified dwelling as a principal residence only in the narrow circumstances where
  1. the trust is one of the trusts described in paragraph 104(4)(a) and subparagraph 104(4)(a)(iii) (spousal trusts or common-law partner trusts) and the spouse or common-law partner is still alive;

  2. the trust is an alter ego trust described in subparagraphs 104(4)(a)(ii.1) and 104(4)(a)(iv) and the taxpayer is still alive;

  3. the trust is a “pre-1972 spousal trust” and the spouse or common-law partner is still alive;

  4. a trust acquired the property in circumstances described in section 73 or subsection 107.4(3) and the acquisition did not result in a change in the beneficial ownership of the property, and the transferor is still alive;

  5. the trust is a “qualified disability trust” as defined in subsection 122(3) in which an “electing beneficiary” is both a resident of Canada and a specified beneficiary of the trust; or

  6. the trust was settled by one of the deceased parents of a minor who is a specified beneficiary of the trust and resident in Canada.

In each case, the terms of the trust must provide the relevant specified beneficiary with a right to the use and enjoyment of the qualified dwelling as a residence throughout the period in the year in which the trust owns the property.

Other than a vague reference in the explanatory notes stating that the changes are intended to align the rules for dwellings held by trusts more closely with those for dwellings held by natural persons, there is no statement about what mischief this change seeks to avoid. However, ordinary inter vivos trusts established for bona fide reasons (for example, to exclude the value of a home from a net family property determination on the breakdown of a marriage) are severely and negatively affected.

For structures in which a trust other than those described above owns a residential property, the end of 2016 has become a critical deadline. Any non-qualifying trust that retains ownership of a qualifying dwelling past 2016 will not be able to claim the exemption for post-2016 appreciation. The draft legislation provides for a deemed disposition at fair market value at the end of 2016, which enables a trust to shelter accrued gains to that date.

Jesse Brodlieb
Dentons Canada LLP, Toronto

Canadian Tax Focus
Volume 6, Number 4, November 2016
©2016, Canadian Tax Foundation