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: Whether the principal residence exemption would be available during the years a house was owned by a trust and inhabited by a person who only had a life interest. On her death, her five brothers would have the right to the residual in the trust.
Position: Yes.
Reasons: A housing unit may be designated as a principal residence of a personal trust that is resident in Canada for each year in which the property is ordinarily inhabited by a specified beneficiary of the trust. In order to qualify as a "specified beneficiary", a person must, inter alia, be an individual who is "beneficially interested" in the trust. The term "beneficially interested" is partially defined in the Act. A person beneficially interested in a trust includes any person that has a right as a beneficiary under a trust to receive income or capital of the trust. Since the amendment to that definition in 1997 to make it an "inclusive" type of definition, the term may now include a person who has the right to reside in a housing unit owned by the trust rent-free.
September 6, 2006
XXXXXXXXXX
Dear XXXXXXXXXX:
I am replying to your letter received on July 18, 2006, concerning the tax affairs of your mother, XXXXXXXXXX.
You indicate that your mother plans to transfer her house to a personal trust with your sister having the right to live in it until her death upon which you and her other brothers would be entitled to the remainder of the trust property. You have asked whether the principal residence exemption would be available to the personal trust for the years during which your sister will inhabit the house.
The Canadian system of taxation is based on self-assessment and each taxpayer is responsible for his or her tax affairs. The Canada Revenue Agency (CRA) strives to promote compliance with Canada's tax legislation and regulations through communication, quality service, and responsible enforcement. The CRA does not provide tax-planning advice. Therefore, it would be inappropriate for me to advise you on how your mother should arrange her tax affairs or whether she should request an advance income tax ruling, but I can provide you with some general comments that may be helpful.
If a personal trust sells a property, the tax consequences will depend, among other things, on whether that property is a principal residence. Generally, a principal residence of a personal trust is a property that is ordinarily inhabited by a specified beneficiary of the trust by the spouse or former spouse, or by a child of the specified beneficiary. If the property qualifies as the personal trust's principal residence for one or more tax years in which the personal trust owned the property, the personal trust may use the principal residence exemption to reduce or eliminate any capital gain that must otherwise be included in the personal trust's income. I am attaching a copy of Interpretation Bulletin IT-120R6, Principal Residence, as well as forms T1079, Designation of a Property as a Principal Residence by a Personal Trust, and T1079-WS, Principal Residence Worksheet, for a detailed explanation of how to calculate the amount of the principal residence exemption.
In order to qualify as a specified beneficiary for the principal residence exemption, a person must, among other things, be "beneficially interested" in the trust. Generally, a beneficially interested person has a right as a beneficiary under a trust to receive income or capital of the trust, and may include a person who has the right to reside rent-free in a housing unit owned by the trust. Therefore, your sister may be beneficially interested in the trust, depending on how the trust will be structured. Also, she could qualify as a specified beneficiary if she will ordinarily inhabit the housing unit.
Paragraph 35 of Interpretation Bulletin IT-120R6 contains more details about the principal residence exemption available to a personal trust.
While the CRA does not provide tax planning advice, it can issue an advance income tax ruling. This ruling is a written statement given to a taxpayer that states how the CRA will interpret and apply specific provisions of existing Canadian income tax law to a definite transaction or transactions that the taxpayer is contemplating. The format and procedure for advance income tax ruling requests are set out in the attached Information Circular 70-6R5, Advance Income Tax Rulings. Your mother may want to consult a tax professional to best plan her tax affairs and to determine whether an advance income tax ruling would be advisable.
All previously mentioned publications are also available on the CRA Web site at www.cra.gc.ca/formspubs/menu-e.html.
I trust that the above information will be helpful.
Sincerely,
The Honourable Carol Skelton, P.C., M.P.
Attachments
Author :Charles Rafuse 957-8967
Reviewer : Sandy Parnanzone 957-2133
August 8, 2006
2006-019421
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