2017-0724121C6 2017 CTF - Q2 - Trusts and principal residence

Principal Issues: Whether, for housing units acquired on or after October 3, 2016 by a trust for which a day is to be determined under paragraph 104(4)(a), (a.1), or (a.4), to qualify as a principal residence, the terms of the trust must provide the eligible beneficiary with a right to use and enjoy the housing units as a residence throughout the period in the year that the life interest trust owns the property.

Position: The wording of proposed subclause (c.1)(iii.1)(A)(III) of the definition of “principal residence” in the Oct 3, 2016 NWMM would have required it. However, the subclause has been dropped from Bill C-63 which was tabled in Parliament on Oct 27, 2017.

Reasons: Wording of the legislation.

Author: Campbell, Katie
Section: Section 54 definition of “principal residence”, 104(4)

2017 CTF Annual Conference
CRA Roundtable

Question 2: Trusts and Principal Residence Exemption

The Department of Finance released new rules in a Notice of Ways and Means Motion on October 3, 2016 which restrict the circumstances under which a personal trust will be able to claim the principal residence exemption effective for taxation years starting in 2017 or later.

Only certain trusts will be eligible to claim the exemption under the new rules.  Eligible trusts include life interest trusts (e.g., alter ego trusts, spousal or common-law partner trusts and joint spousal trusts), among certain other trusts.

Under the new rules, where the trust acquires the property on or after October 3, 2016, the terms of the trust must provide the eligible beneficiary with “a right to the use and enjoyment of the housing unit as a residence throughout the period in the year that the trust owns the property”.

Does a life interest trust’s deed have to include the specific wording found in new subclause 54(c.1)(iii.1)(A)(III) of the definition of “principal residence”?  One of the conditions of being classified as a life interest trust is that only the settlor and/or his or her spouse, as the case may be, is entitled to receive or otherwise use any of the trust’s capital property during their lifetime. Is it sufficient that the trust deed already incorporates language providing that no one other than the life interest beneficiary has the right to use any of the trust property, which would include any housing unit held by the trust?

CRA Response

The Notice of Ways and Means Motion of October 3, 2016 (the “2016 NWMM”) introduced proposed new rules whereby only certain types of personal trusts would be eligible to claim the principal residence exemption for a taxation year that begins after 2016.  These personal trusts included trusts for which a day is to be determined under paragraph 104(4)(a), (a.1) or (a.4) by reference to the death or later death, as the case may be, that has not occurred before the beginning of the year, of an individual who is resident in Canada during the year (referred to in this response as a “life interest trust”).  One of the requirements to qualify as a life interest trust is that the terms of the trust must ensure that only the settlor and/or his or her spouse or common-law partner, as the case may be, (referred to in this response as a “specified beneficiary”) is entitled to receive or otherwise use any of the life interest trust’s capital during their lifetime.

The 2016 NWMM introduced proposed subclause (c.1)(iii.1)(A)(III) of the definition of principal residence in section 54 (the “Proposed Subclause”) which provided that in order for a property acquired by a life interest trust on or after October 3, 2016 to qualify as a principal residence, the terms of the trust had to provide the specified beneficiary with “a right to the use and enjoyment of the housing unit as a residence throughout the period in the year that the trust owns the property.”

However, we note that the Proposed Subclause, as well as proposed subclauses (c.1)(iii.1)(B)(III) and (C)(II), which would have imposed the same requirement in respect of the other categories of trusts identified in proposed subparagraph (c.1)(iii.1) of the principal residence definition in the 2016 NWMM, is not present in Bill C-63, The Budget Implementation Act, 2017, No 2, which was tabled in Parliament on October 27, 2017.

Notwithstanding the changes in Bill C-63 noted above, it is our view that a provision in the terms of the trust that only the specified beneficiary is entitled to the use of the life interest trust’s capital during their lifetime would not be equivalent to a right of that specified beneficiary to use and enjoy a housing unit as a residence throughout the period in the year that the life interest trust owns the property.  Trust terms that provide that no one other than the specified beneficiary has the right to use and enjoy the property of the trust would have fallen short of specifically meeting the key requirement in the 2016 NWMM that the specified beneficiary must have the right to use the housing unit owned by the trust as a residence.

Katie Campbell
2017-072412
November 21, 2017

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