Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Can the principal residence exemption be claimed by a person or trust in various situations?
Position: It depends on the facts.
Reasons: The law.
XXXXXXXXXX
2011-040330
N. Shea-Farrow
June 13, 2012
Dear XXXXXXXXXX:
Re: Technical Interpretation Request – Principal Residence Exemption
We are writing in response to your letter of March 31, 2011 requesting our comments on the principal residence exemption with respect to various hypothetical situations. As a number of detailed provisions may or may not apply to the transactions described in your letter, and such a determination requires a review of all relevant facts of each particular situation, including the trust indenture and details relating to the ownership of the property, we are not in a position to provide definite answers to the enquiries raised in your letter. Nevertheless, we are prepared to offer general comments which may be of assistance to you. The Canada Revenue Agency's (CRA) position on the "principal residence exemption" is set out in Interpretation Bulletin IT-120R6 “Principal Residence”.
Our comments are based on the assumption that Parent A transferred the property into the trust in each of the situations and the tax years are after 1981. We also assume that the siblings that are under 18 years of age are unmarried and do not live in common-law partnership and do not designate any other property as a principal residence. We also assume that the trust is an inter vivos personal trust and no non-residents are involved in any of the situations.
Situation 1
An unmarried individual (“Person 1”) is a beneficiary of a discretionary trust. The trust owns a residential property. Person 1 was over 18 years of age for the entire period of time the trust owned the property, and Person 1 ordinarily inhabited the property. Person 1’s parents own another property they will designate as their principal residence for some of the years the trust owned the particular property. The trust distributes the property to Person 1 in satisfaction of their capital interest in the trust. Person 1 subsequently disposes of the property at fair market value.
Q. 1 Would a principal residence exemption be available to Person 1?
The rollover provision of subsection 107(2) of the Income Tax Act ( the “Act”) would apply if the residential property (the “Residence”) transferred into the trust by the Parent A was distributed to Person 1 (the “Beneficiary”) and the trust does not elect out of the treatment for the distribution under subsection 107(2) of the Act, pursuant to subsection 107(2.001) of the Act and assuming that subsections 75(2) and 107(4) of the Act do not apply. Subsection 107(2) of the Act provides that the trust shall be deemed to have disposed of the Residence for proceeds equal to its cost amount which is the adjusted cost base of the Residence and the Beneficiary, shall be deemed to have acquired the Residence at a cost equal to the adjusted cost base of the Residence.
When the Beneficiary realizes a gain on the sale of the Residence, he or she shall determine whether the Residence can be designated as his or her principal residence [pursuant to paragraphs (a) and (c) of the definition of principal residence (the “Definition”) in section 54 of the Act] for a tax year after the date he or she last acquired the property. If the Beneficiary determines that the Residence can be designated as his or her principal residence, paragraph 40(2)(b) of the Act will apply for determining the gain from the disposition for the purposes of the Act.
Subsection 40(7) of the Act will apply to the situation and provides that, for the purposes of paragraph 40(2)(b) of the Act and the Definition, where the Residence is acquired by the Beneficiary, in satisfaction of a part of his or her capital interest in the trust, he or she shall be deemed to have owned the Residence continuously since the trust last acquired it. Thus, the acquisition date used to determine the number of taxation years mentioned in B and C of the B/C fraction provided for in paragraph 40(2)(b) of the Act will be the date of acquisition by the trust.
However, generally speaking, if, for example, the Residence that was transferred into the trust by Parent A was distributed to the Beneficiary and subsection 75(2) of the Act applies, subsection 107(4.1) of the Act may prevent the application of the rollover provision of subsection 107(2) of the Act and instead 107(2.1) of the Act will apply.
According to subsection 107(2.1) of the Act the trust will be deemed to have disposed of the Residence for proceeds equal to the fair market value at the time the Residence is distributed to the Beneficiary and the Beneficiary is deemed to have acquired the Residence at fair market value. However, if subsection 75(2) of the Act applies any gain on the Residence at the time that the Residence is distributed by the trust to the Beneficiary would be attributed to Parent A. This assumes that the trust itself has not claimed the principal residence exemption and reduced the amount to be attributed to nil.
If the Beneficiary realizes a gain on the sale of the Residence when the Beneficiary subsequently disposes of the property at fair market value, he or she shall determine whether the Residence can be designated as his or her principal residence (pursuant to paragraphs (a) and (c) of the Definition). If such is the case, the acquisition date used to determine the number of taxation years mentioned in B and C of the B/C fraction provided for in paragraph 40(2)(b) of the Act will not include the tax years that the trust held the Residence.
Q. 2 Would a principal residence exemption be available to Person 1 if his siblings who were not over 18 years of age were also beneficiaries of the trust?
Our comments on this question would be similar to that discussed in our response to question 1.
Q. 3 Would a principal residence exemption be available to Person 1 if, in addition to his siblings, one or both of their parents were beneficiaries of the trust?
Our comments on this question would be similar to that discussed in our responses to question 1 and 2.
Situation 2
Situation 2 that you described was the same as situation 1 except that in situation 2, Person 2 was married. Our general comments would be that same as those given for situation 1. In addition, Person 2 would also have to consider his or her spouse in determining whether or not the property transferred out of the trust and later sold by Person 2 can be designated as his or her principal residence for a tax year.
Situation 3
Situation 3 is similar to situation 1 except that Person 3’s siblings who were not over 18 years of age and their mother were also beneficiaries of the trust and at some point the mother renounces her beneficial interest in the trust and according to you it is legally effective. Our comments would be similar to situation 1.
Situation 4
Situation 4 is similar to situation 1 except that Person 4’s siblings are specified beneficiaries also and the trust sells the property. Would a principal residence exemption be available to the trust?
If Parent A is living and the trust disposes of the Residence at fair market value the trust would not be allowed to designate the Residence held in the trust as its principal residence for any tax year that either parent, of Person 4’s siblings that were under 18 years of age, designated another property as a principal residence as per subparagraph (c.1)(iv) under the Definition.
If Parent A is living at the time that the trust disposes of the Residence at fair market value, any gain on the Residence would be attributed to Parent A if subsection 75(2) of the Act applies. The fact that the capital gain will be attributed to Parent A will not mean that Parent A will have a principal residence exemption in respect of the property. As is noted in paragraph 4 of IT-120R6, for a property to be a taxpayer's principal residence for a particular year, the taxpayer must own the property in the year. Thus, Parent A could not have a principal residence exemption with respect to this property.
While we trust that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC70-6R5 and are not binding on the CRA in respect of any particular situation.
Yours truly,
Sharmini Ratnasingham
Assistant Director
For Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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