14 June 2010 External T.I. 2010-0362011E5 - Capital gains on sale of family home

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 capital gains exemption can be claimed as a result of a sale of a family home

Position: Question of fact. If a personal trust was created as a consequence of death, the personal trust may claim the principal residence exemption to reduce or eliminate a capital gain that the trust would otherwise have on the disposition of the family home, subject to the conditions in paragraph 40(2)(b) of the Act and in paragraph 35 of IT-120R6.

Reasons: In accordance with the legislation and prior positions.

XXXXXXXXXX
									2010-036201
									T. Elsey

June 14, 2010

Dear XXXXXXXXXX :

Re: Estate of XXXXXXXXXX
Capital Gains Exemption - Sale of Family Home

We are writing in response to your letters dated March 18, 2010 and May 11, 2010. In your letters, you requested our opinion as to whether the capital gains exemption can be claimed as a result of the sale of a family home. As communicated to you on April 21, 2010, your request was identified as a technical interpretation rather than an advance income tax ruling.

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency (CRA) publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments on the relevant provisions of the Act, which may apply.

Based on the information provided by you, we understand the facts to be as follows: "A", the mother of two children ("B" and "C") who were both at least 18 years of age when A died in XXXXXXXXXX , left a Will that provided to her unmarried child (C) the right to occupy the family home that A had occupied prior to her death for as long as C wished and when C no longer wished to occupy it or she died, the family home was to be sold and the proceeds divided, 60% to C's estate and the remaining 40% to B who lived in another city. From XXXXXXXXXX when A died until XXXXXXXXXX when C died, C remained in the family home and it was her principal residence. C has now died and as a result, the family home is being sold with proceeds to be allocated in accordance to A's Will (i.e., 60% to C's estate and 40% to B).

Our Comments

The tax implications for the situation described above largely depend on whether a personal trust was created by A's Will. A personal trust is defined in subsection 248(1) of the Income Tax Act (the "Act") as a trust (other than a trust that is, or was at any time after 1999, a unit trust) that is:

(a) a testamentary trust, or

(b) an inter vivos trust no beneficial interest in which was acquired for consideration payable directly or indirectly to

i. the trust, or

ii. any person or partnership that has made a contribution to the trust by way of transfer, assignment or other disposition of property.

Subsection 108(1) of the Act defines a testamentary trust generally, as a trust or estate that arose on and in consequence of the death of an individual, and goes on to provide some exceptions to that definition.

It is a question of fact whether or not a trust has been set up by a taxpayer's will. If a trust was set up by A's Will, the family home would have remained the property of A's personal trust upon A's death. Therefore, upon the sale of the family home, subsequent to C's death, it would be A's personal trust that would have realized the capital gain on the sale of the family home. Since B and C will simply receive proceeds from the sale of the family home when the estate is settled, there would be no capital gain for either of them upon the sale of the family home.

If a property qualifies as a taxpayer's principal residence, the principal residence exemption may be used to reduce or eliminate any capital gain otherwise occurring, for income tax purposes, on the disposition (or deemed disposition) of the property. According to paragraph 35 of IT-120R6, Principal Residence, it is possible for a personal trust to claim the principal residence exemption to reduce or eliminate a capital gain that the trust would otherwise have on the disposition of a property. In order to do so, the normal principal residence exemption rules in paragraph 40(2)(b) of the Act apply subject to the conditions listed in paragraph 35 of IT-120R6.

The term "principal residence" is defined in section 54 of the Act and the principal residence exemption is claimed under paragraph 40(2)(b) of the Act. Where the "taxpayer" referred to in the definition of "principal residence" in section 54 of the Act is a personal trust, paragraph 54(a.1) of the principal residence definition requires that the housing unit be ordinarily inhabited by a "specified beneficiary" of the trust or by the spouse or former spouse or a child of a specified beneficiary. In order to qualify as a "specified beneficiary", which is defined in paragraph 54(c.1)(ii) of the definition of "principal residence", a person must be an individual who is "beneficially interested" in the trust and the person must ordinarily inhabit the housing unit or have a spouse or former spouse or child who ordinarily inhabited it. The term "beneficially interested" is defined in subsection 248(25) of the Act as a person that has the right as a beneficiary under the trust to receive income or capital of the trust.

Based on our understanding of the facts, and should a trust have been created by A's Will, both B and C would be considered to be "beneficially interested" in it since both appear to have a right to receive its income or capital. However, only C could be considered to be a "specified beneficiary" since only C ordinarily inhabited the family home from the time of A's death until the time of C's death. We understand that B lived in another city during this time and that neither of B's spouse or former spouse or child ordinarily inhabited the family home during this time. Since the family home was ordinarily inhabited by a specified beneficiary of the trust, C, it appears that the family home would qualify as the trust's "principal residence" in accordance with section 54 of the Act.

If the trust wishes to claim the principal residence exemption to reduce or eliminate any capital gain otherwise occurring, for income tax purposes, on the disposition of the family home, the conditions under paragraph 40(2)(b) of the Act and in paragraph 35 of IT-120R6 must be met. One such condition in paragraph 35 of IT-120R6 is that in order for the trust to designate a property as its principal residence for one or more taxation years, the trustee of the trust should complete and file the following designation forms: T1079, Designation of a Property as a Principal Residence by a Personal Trust, and T1079-WS, Principal Residence Worksheet and file them with the T3 trust return for the year in which the disposition occurs. Please refer to paragraph 35 of IT-120R6 for the further information.

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 IC 70-6R5 and are not binding on the CRA in respect of any particular situation.

Yours truly,

Randy Hewlett
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch