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. Are the expenses or outlays incurred for the maintenance and the upkeep of a residence owned by an estate deductible?
2. What are the tax consequences of the disposition of a residence owned by an estate?
Position: 1. In the particular situation, no.
2. General comments on the principal residence exemption and the taxation of the estate or its beneficiaries.
Reasons: 1. The estate does not earn any income and subsection 105(2) does not apply.
2. The tax consequences will depend, inter alia, on whether or not the residence is a principal residence. We consider that a person who has the right to use the residence of an estate rent-free is beneficially interested in the estate and, if that person inhabits the house, qualifies as a specified beneficiary.
XXXXXXXXXX 2005-014148
Sylvie Labarre, CA
January 25, 2006
Dear Madam:
Re: Residence held by an estate
This is in reply to your letter of July 7, 2005 in which you requested our views with respect to the deductibility of maintenance or upkeep outlays incurred by an estate and with respect to the tax consequences of the disposition of a residence held by an estate.
Facts
The terms of a will provide that the principal residence of a deceased must be retained by his estate for as long as his second wife wishes to reside in it. Although all other aspects of the will and estate have been settled, the residence still remains as part of the estate.
Although you have asked for a technical interpretation, the situation presented is a factual one involving specific taxpayers. Requests for confirmation of the tax consequences of this type of situation are handled by the local tax services office. We are, however, prepared to provide some general comments.
In regard to your first question, the outlays incurred for the maintenance and upkeep of a residence that is not used to earn income from a business or property will not be deductible in computing the income of the trust (for the purposes of the Income Tax Act (the "Act"), an estate is a personal trust), except in a situation where subsection 105(2) and subparagraph 104(6)(b)(i) of the Act apply. Subsection 105(2) of the Act will apply only if the estate earns income in a year and only to the extent that the estate pays the maintenance and upkeep expenses out of its income. Subsection 105(2) of the Act provides for the inclusion of a benefit in the income of a beneficiary or a tenant for life. We understand from the facts mentioned in your letter that the estate does not earn income and does not pay the maintenance and upkeep expenses out of its income. Therefore, subsection 105(2) of the Act would not apply and these expenses would not be deductible.
Where a personal trust sells a residence, the tax consequences will depend, inter alia, on whether or not that residence is a principal residence. It is possible for a personal trust to claim the principal residence exemption to reduce or eliminate a gain that the trust would otherwise have on the disposition of a property. Such a gain would have been computed by deducting, from the proceeds of disposition, the adjusted cost base of the house immediately before the disposition for the estate (probably equal to the proceeds of disposition of the deceased) and the expenses or outlays incurred for the purpose of making the disposition.
Generally, 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 or by the spouse or former spouse or a child of the specified beneficiary. If the property qualifies as the personal trust's principal residence for one or more taxation years in which the personal trust owned the property, the principal residence exemption may be used to reduce or eliminate any capital gain which would otherwise be required to be included in the personal trust's income. We refer you to 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. (Note that the estate does not have to complete and file Form T1079 in the income tax return of a taxation year preceding the disposition of the principal residence.)
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. Therefore, the second wife could be viewed as being beneficially interested in the trust. To be a specified beneficiary in a situation like yours, the person beneficially interested also has to ordinarily inhabit the housing unit or have a spouse or common-law partner, former spouse or common-law partner or child who ordinarily inhabits the housing unit. Therefore, the second wife would be a specified beneficiary for the purposes of the definition of principal residence. We do not know whether there are other persons qualifying as specified beneficiary.
You will find in paragraph 35 of Interpretation Bulletin IT-120R6 a list of conditions that must be met to claim the principal residence exemption for a taxation year. Where a personal trust designates a property as its principal residence for a particular taxation year, the property is deemed to be property designated, for the calendar year ending in the year, as the principal residence of each specified beneficiary of the trust. In such a case, the specified beneficiary cannot designate another property as his/her principal residence for that year.
After deducting the principal residence exemption, the gain realized upon disposition of the residence may be nil. In such a case, the proceeds may be distributed to the beneficiaries of the estate without attracting any income tax. However, if the gain is not reduced entirely by the principal residence exemption, a taxable capital gain will result from the disposition. The question then is whether this taxable capital gain is paid or payable to the beneficiaries. The amount of the taxable capital gain paid or payable to a beneficiary will be included in the beneficiary's income. Any portion of the amount of a taxable capital gain realized in a taxation year by an estate that is not included in the income of a beneficiary for that year is taxable in the hands of the estate.
However, pursuant to subsection 104(13.2) of the Act, you can elect to report all or part of the gain that was paid or payable to a beneficiary on the trust return, rather than report it in the hands of the beneficiaries, as long as the trust is resident in Canada throughout the year and is not exempt from tax. This will reduce the beneficiary's taxable capital gains from the trust by that beneficiary's proportionate share of taxable capital gains reported on the trust's return.
We trust the above has been of some assistance and we regret the delay in responding..
Yours truly,
Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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