2015-0584611E5 PRINCIPAL RESIDENCE - DECEASED ESTATE

Principal Issues: Availability of principal residence in situation where spouse occupied house after death.

Position: Available.

Reasons: After 1990--no longer restricted to spousal trusts.

Author: Holloway, Lena
Section: 54; 45(2)

XXXXXXXXXX

2015-058461
L. Holloway, CPA, CA

May 21, 2015

Dear XXXXXXXXXX:

Re: Estate of a Deceased Taxpayer- Principal Residence Exemption

We are writing in response to your correspondence dated April 29, 2015. Your enquiry concerned the operation of the principal residence exemption in a situation where a house owned by a particular individual is transferred to a trust upon his death, according to the direction provided in his will.

You presented a situation in which an individual “Mr. X” lived in the house in question with his second wife (“Mrs. X”) until his death in XXXXXXXXXX. The house was transferred to his estate and according to the trust terms, provided Mrs. X with the right to occupy the house as long as she desired. The terms of the trust also provided for the residue of the estate to be held in trust during Mrs. X’s lifetime, with XXXXXXXXXX of the income of the trust to be paid to her and the other XXXXXXXXXX to be paid to the children from Mr. X’s first marriage. The house was to be sold when Mrs. X no longer occupied it and after the death of Mrs. X, the capital of the trust was to be paid to the children.

Assuming Mrs. X will no longer occupy the house and therefore the house will be sold, you had asked if the principal residence exemption could be claimed to shelter all the capital gains of the property accrued since Mr. X’s death in XXXXXXXXXX.

Unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter (the “Act”).

Our Comments

Written confirmation of the income tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular 70-6R6 dated August 29, 2014, issued by the Canada Revenue Agency (“CRA”) This service requires a fee. As a number of detailed provisions may or may not apply to the events 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 a definite answer to your enquiry. This technical interpretation provides general comments about the provisions of the Act and does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.

The CRA’s general views regarding the principal residence exemption are contained in Income Tax Folio S1-F3-C2 (the “Folio”), which is on the CRA website at http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f3/s1-f3-c2-eng.html.

Paragraph 2.65 of the Folio points out that it is possible for a personal trust (as defined in subsection 248(1)) to claim the principal residence exemption to reduce or eliminate a gain that the trust would otherwise have on the disposition of a property. For this purpose, the normal principal residence exemption rules generally apply, subject to some modifications. For example:

1. when a personal trust designates a property as its principal residence for one or more tax years, the trustee of the trust must complete and file Form T1079, Designation of a Property as a Principal Residence by a Personal Trust. For purposes of calculating a capital gains election reduction amount (see paragraphs 2.17 – 2.26 of the Folio) for the trust, the trustee should complete Form T1079-WS, Principal Residence Worksheet, and file it with the T1079 designation form.
2. For each tax year for which the trust is designating the property as its principal residence, the trust must specify in the above–mentioned designation each individual who, in the calendar year ending in that tax year:

• was beneficially interested in the trust; and
• ordinarily inhabited the housing unit or who had a spouse or common–law partner, former spouse or common–law partner, or child who ordinarily inhabited the housing unit (a subsection 45(2) or (3) election can be used, however, in essentially the same manner as, and subject to the limitations discussed in paragraphs 2.50 – 2.51 and 2.56 of the Folio, to remove the requirement that the ordinarily inhabited rule be fulfilled for the year by one of these persons).
  
  Any individual specified by the trust to be an individual as described above is referred to as a specified beneficiary of the trust for the year.

3. For each tax year for which the trust is designating the property as its principal residence, there must not have been any corporation (other than a registered charity) or partnership that was beneficially interested in the trust at any time in the year.
4. For each tax year for which the trust is designating the property as its principal residence (including years before 1982), no other property may have been designated as a principal residence, for the calendar year ending in the year, by any specified beneficiary of the trust for the year, or by any person who throughout the calendar year ending in the year was a member of such a beneficiary’s family unit. For this purpose, a specified beneficiary’s family unit includes, in addition to the specified beneficiary, the following persons (if any):

• the specified beneficiary’s spouse or common–law partner throughout the calendar year ending in the year, unless the spouse or common–law partner was throughout that calendar year living apart, and was separated pursuant to a judicial separation or written separation agreement, from the specified beneficiary;
• the specified beneficiary’s children, except those who were married, in a common–law partnership or 18 years of age or older during the calendar year ending in the year; and
• where the specified beneficiary was not married, in a common–law partnership or 18 years of age or older during the calendar year ending in the year:
  • the specified beneficiary’s mother and father; and the specified beneficiary’s brothers and sisters who were not married, in a common–law partnership or 18 years of age or older during that calendar year.

Therefore it appears in your hypothetical example, if the trust sells the house, it may be allowed to designate the residence as its principal residence for any tax year after XXXXXXXXXX as long as neither Mrs. X or Mr. X’s children (in years where they were under 18 years of age, single and not in a common-law relationship), had designated another property as a principal residence as per subparagraph (c.1)(iv) under the definition of principal residence in section 54 of the Act. In years where the children were over eighteen years of age, were married or were in a common-law partnership, and assuming that Mrs. X was the only trust beneficiary who ordinarily inhabited the residence in all years from XXXXXXXXXX onwards, the trust could designate the property as a principal residence as long as Mrs. X did not designate another residence as her principal residence in those years. Note that the principal residence exemption was only available to spousal trusts prior to 1991. Provided that all the requirements specified above are met, all personal trusts can use the principal residence exemption for dispositions of property occurring after 1990.

We trust our comments will be of assistance.

Yours truly,

Phil Kohnen
Manager,
Trusts Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch

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