CRA indicates that a principal residence designation must be made on the transfer of a principal residence to a life interest trust in order for the property to qualify as such in the trust’s hands

An individual over 65 transfers both a city property and a recreational property, each of which would otherwise have qualified as the transferor's principal residence, to a life interest trust (LIT), i.e., an alter ego trust, joint spouse or common-law partner trust, or spousal trust. Must the transferor choose which of the city or recreational property to designate as a principal residence at the time of such transfer in order for the property to qualify as a principal residence of the LIT for the pre-transfer period when it ultimately disposes of that property?

CRA indicated that there was a significant difference between the scope of s. 40(2)(b)(i), dealing with a transfer to an LIT on death, and s. 40(2)(b)(ii), dealing with an inter vivos transfer pursuant to s. 73(1). Property transferred on death was deemed to be the principal residence of the transferee for each year in which it was eligible to be the deceased transferor's principal residence, rather than for each year that it actually was the transferor's principal residence in the case of an inter vivos transfer.

The stricter language regarding an inter vivos transfer effectively meant that the transferor was required to designate which of the transferred residences was the transferor's principal residence by filing the required designation in respect of that particular property in the transferor’s return for the taxation year of the transfer.

Neal Armstrong. Summary of 17 June 2025 STEP Roundtable, Q.10 under s. 40(2)(b)(ii).