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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Can the settlor of an alter ego trust have a separate principal residence from that of the alter ego trust for taxation years before 1982 if the settlor acquired a property that was his or her spouse's principal residence prior to the spouse's transfer to the settlor under 73(1) or 70(6) and the settlor owned another property which otherwise qualified as a p\r for the years in question?
Position: Yes
Reasons: When 40(4)(b) deems a property to be the p\r of the recipient, it does not prevent the recipient from designating another property as his or her principal residence for taxation years before 1982. After 1981, the rules in the definition of principal residence in 54 prevent a taxpayer and spouse from designating more than one property as a p\r in any one taxation year.
XXXXXXXXXX 2002-012416
Annemarie Humenuk
Attention: XXXXXXXXXX
June 19, 2002
Dear XXXXXXXXXX:
Re: Principal Residence Designation for an Alter Ego Trust
This is in reply to your letter of February 13, 2002, and further to our telephone conversation of May 15, 2002 (XXXXXXXXXX/Humenuk) in which you clarified the nature of your enquiry.
You have asked us to comment on whether our comments to you in our letter of September 1, 1995 concerning the application of subsection 40(4) would also apply to a disposition of property acquired by an alter ego trust under subsection 73(1). In particular, you asked whether subsection 40(4) would deem the property held by an alter ego trust to be its principal residence for taxation years before 1982 where the settlor originally acquired the property from his or her spouse under subsection 73(1) or subsection 70(6) and the settlor had designated some other property as his or her principal residence for the same taxation years on the disposition of that property.
As stated in our previous letter, subsection 40(4) applies for the purposes of computing the capital gain on the disposition of property under paragraph 40(2)(b) where the taxpayer acquired the property in circumstances to which subsection 73(1) or 70(6) applied. Under paragraph 40(4)(a), the transferee is deemed to have owned the property throughout the years the transferor owned the property, and under paragraph 40(4)(b) the property is deemed to have been the transferee's principal residence for any year in which it was the transferor's principal residence (or, in the case of property acquired in circumstances under which subsection 70(6) applied, would have been the transferor's principal residence if the transferor had designated it to be his or her principal residence for that year).
The effect of subsection 40(4) of the Act is not to deem the transferee to have two principal residences for the period in which the transferor owned the property but rather to make it possible for the transferee to claim the principal residence exemption under paragraph 40(2)(b) on the property so acquired for taxation years when it was (or would have been, in the case of a transfer under subsection 70(6)) the transferor's principal residence. The deeming provision of paragraph 40(4)(b) does not prevent the transferee from designating another property, assuming it otherwise so qualifies, as his or her principal residence for any taxation year in which subsection 40(4) deems the transferred property to be the transferee's principal residence. However, as an alter ego trust, by definition, is created after 1999, it is not possible for the alter ego trust to designate a property as a principal residence for taxation years before 1982 (as it is a taxation year before the creation of the trust), although paragraph 40(4)(b) may deem the alter ego trust to have a principal residence for a taxation year before it was created.
When the settlor of an alter ego trust acquired property from a spouse under circumstances to which subsection 40(4) applied, that property is deemed to be the principal residence of the settlor for the taxation years in which it was the settlor's spouse's principal residence (or in the case of property acquired in circumstances under which subsection 70(6) applied, would have been the settlor's spouse's principal residence if the settlor's spouse's had designated it to be his or her principal residence for that year). As a result, if the settlor subsequently transfers that property to the alter ego trust in circumstances in which subsection 73(1) applies, paragraph 40(4)(b) will deem the property to be the principal residence of the alter ego trust for each year in which it was either deemed to be the settlor's principal residence or was in fact designated as such by the settlor. As the deeming provision of paragraph 40(4)(b) does not prevent the settlor from designating another property as his or her principal residence apart from the property which was the principal residence of the settlor's spouse provided it otherwise so qualifies, it is possible that the alter ego trust will be deemed to have a different principal residence property from that of the settlor for taxation years before 1982. For example, if the settlor transfers the property acquired from his or her spouse to the alter ego trust, subparagraph 40(4)(b)(ii) will deem the property to be the principal residence of the alter ego trust for each year in which it was deemed to be the principal residence of the settlor under paragraph 40(4)(b) by reason of the settlor's acquisition of the property under circumstances to which subsection 70(6) or 73(1) applied, even if the settlor designates another property as his or her principal residence for any taxation year before 1982.
However, as each family unit can only have one principal residence per year after 1981, the property transferred to the alter ego trust would not have been eligible to be the principal residence of the settlor's spouse for taxation years after 1981 if the settlor had already designated a separate property as his or her principal residence for that taxation year. Alternatively, for any taxation year after 1981 in which the property transferred to the alter ego trust was the principal residence of the settlor's spouse, the settlor would not be able to designate any other property as his or her principal residence for the same taxation year.
These comments represent a general interpretation of the law and, as such, may not be applicable in every situation. The determination of the tax consequences of a particular situation can only be made following a review of all the relevant facts and documentation.
We trust our comments will be of assistance.
T. Murphy
for Director
International and Trusts Division
Income Tax Rulings Directorate
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