September 4, 2019
XXXXX
XXXXX
XXXXX
XXXXX
Dear XXXXX:
Principal Residence Exemption for Trusts
I am writing in response to the issue raised in your correspondence and discussions with officials of Tax Legislation Division concerning the ability of an inter vivos trust established for the benefit of an individual eligible for the Disability Tax Credit (DTC) to qualify for the principal residence exemption. Specifically, you are concerned that the XXXXX Trust, an inter vivos trust established by your client for the benefit of his DTC- eligible son, is ineligible for the principal residence exemption.
On October 3, 2016, income tax measures were announced, and subsequently introduced into law as part of Budget Implementation Act, 2017, No. 2, to ensure that the principal residence exemption is available only in appropriate cases. As part of these rules, the definition "principal residence" in section 54 of the Income Tax Act was amended to add additional eligibility requirements for trusts claiming the principal residence exemption for a taxation year that begins after 2016, including limiting eligibility for the principal residence exemption to three categories of trusts.
In order to accommodate trusts that hold property for the benefit of a Canadian resident who is disabled, the measure preserved the ability of a qualified disability trust to be eligible to claim the principal residence exemption. A qualified disability trust must be a testamentary trust (generally a trust that arose on and as a consequence of the death of an individual, subject to certain exception) where, among other criteria, a beneficiary of the trust is DTC-eligible.
You note that following the introduction of the measures described above, the XXXXX Trust would no longer qualify for the principal residence exemption since the trust was established during the lifetime of the settlor, rather than as a testamentary trust.
Our Comments
We agree that it would be appropriate to make certain inter vivos trusts eligible to claim the principal residence exemption. We are therefore prepared to recommend to the Minister of Finance that the Income Tax Act be amended in a manner that allows an inter vivos trust for the benefit of an individual who is DTC-eligible to be eligible to claim the principal residence exemption as long as certain conditions are met. To this end, we will recommend that the definition "principal residence" be amended so that a trust will be allowed to designate a property as a principal residence for a taxation year provided that all other designation requirements are fulfilled (including the requirements relating to occupation of the property and one property per family unit) and the following conditions are met:
- a beneficiary of the trust is an individual resident in Canada during the year who is eligible for the DTC;
- the beneficiary is a child, spouse, common-law partner, or former spouse or common-law partner, of the settlor of the trust; and
- no person other than a beneficiary described above may, during the beneficiary's lifetime, receive or otherwise obtain the use of any of the income or capital of the trust.
We will also recommend that the amendment applies to taxation years that begin after 2016.
While we cannot offer any assurances that either the Minister of Finance or Parliament will agree with our recommendation in respect of this matter, we hope that this statement of our intention is helpful.
Yours sincerely,
Brian Ernewein
Assistant Deputy Minister – Legislation
Tax Policy Branch
