10 August 2004 External T.I. 2004-0066871E5 - principal residence held in alter ego trust

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: 1. Can the principal residence exemption be used to eliminate any gain realized on the transfer of an individual's plr to another ego trust?

2. Whether a gain realized by the trust on the deemed or actual disposition of the property will qualify for the principal residence exemption.

3. Whether the alter ego trust (or its trustee) can be the beneficiary of an RRIF or LIF.

Position: 1. Normally the property would be transferred at cost (not fmv), but if a gain is recognized, the principal residence exemption could be used.

New 1.

2. Yes.

3. Yes.

Reasons: 1. 73(1) and (1.01)(c)(ii) enable property to be rolled to an alter ego trust. However, 73(1) permits the transferor to elect out.

2. The definition of "principal residence" in section 54 of the Act provides in paragraphs (a.1) and (c.1) that a personal trust may generally claim a property as a principal residence

3. No provision in the Income Tax Act prohibits such a designation.

J. D. Brooks
XXXXXXXXXX 2004-006687
(613) 957-2103
August 10, 2004

Dear XXXXXXXXXX:

Re: Transfer of Property to Alter Ego Trust

This is in reply to your enquiry of March 9, 2004 in which you raised some questions regarding the possible transfer of a principal residence, a registered retirement income fund ("RRIF") and a life income fund ("LIF") to an alter ego trust. With respect to your RRIF and LIF, you question whether it is possible to name the trust as the beneficiary of the funds.

Our comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA").

For the purposes of this letter, we assume that the individual and the trust are resident in Canada and that the real property is located in Canada and that the trust qualifies as an alter ego trust.

Where an individual transfers a property to an alter ego trust, subsection 73(1) of the Income Tax Act (the "Act") enables the individual to transfer the property without recognition of a gain. In that case, when subsequently calculating a gain by the trust on either a deemed or actual disposition of the property, subsection 40(4) provides that, for the purpose of determining the principal residence exemption, the trust would be treated as if it owned the property throughout the period that the individual owned it. The ability of the trust to claim the principal residence exemption is explained in more detail in the following paragraph. Alternatively, subsection 73(1) permits the individual to opt out of the subsection, in which case the property would be considered to have been transferred to the trust at its fair market value. If the property qualified as a principal residence for the relevant years, an exemption could be claimed by the individual under paragraph 40(2)(b) of the Act to reduce or eliminate any capital gain otherwise occurring on the disposition of the property.

Once the property is transferred to the trust, the individual no longer owns the property. All of the property of an alter ego trust is deemed to be disposed of and reacquired on the death of the settlor of the trust and thus the trust could realize a capital gain at the time the settlor dies. The definition of "principal residence" in section 54 of the Act provides in paragraphs (a.1) and (c.1) that a personal trust may generally claim a property as a principal residence for a taxation year where, in the calendar year ending in that year, an individual (referred to as a "specified beneficiary") who is "beneficially interested" in the trust (as that term is defined under subsection 248(25) of the Act) ordinarily inhabits the property or whose spouse, common-law partner or former spouse or common-law partner or child ordinarily inhabits it. An alter ego trust would generally be a personal trust. Provided that the individual continues to ordinarily live in the property after it is transferred to the trust, the property will likely be eligible to be designated as the principal residence of the trust for all relevant years. Paragraphs 35 and 36 of IT-120R6 provide additional information on the requirements for claiming the principal residence exemption by a personal trust. You may also refer to form T1079 Designation of a Property as a Principal Residence by a Personal Trust for additional information.

Based on clarification obtained in a telephone conversation (Allen/XXXXXXXXXX) regarding your question on registered retirement income funds (RRIFs), the Act does not define who can be named as a beneficiary under an RRIF. As such, the Act does not specify who may be designated as a beneficiary under an RRIF or contain restrictions concerning the naming of a beneficiary under an RRIF. However, there may be other laws that may be relevant for purposes of naming a beneficiary under an RRIF.

We trust that our comments are of assistance to you.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch