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) Would the election under subsection 107(2.01) become void because a property is distributed to multiple beneficiaries pursuant to subsection 107(2)?
2) Where a property, being a residence, is distributed to multiple beneficiaries, can each beneficiary claim the principal residence exemption provided for in paragraph 40(2)(b) of the Act?
Position: 1) No. 2) Question of fact.
Reasons: 1) We have ruled that subsection 107(2) is applicable in instances where a trust distributes a residence to more than one beneficiary.
2) It is a question of fact whether the property qualifies as a principal residence for each beneficiary.
XXXXXXXXXX
2012-046432
V. Srikanth
September 9, 2013
Dear XXXXXXXXXX:
Re: Application of subsections 107(2) and 107(2.01) of the Income Tax Act (the "Act")
This is in response to your letter dated September 24, 2012, wherein you requested our views on the application of subsections 107(2) and 107(2.01) of the Act with respect to a distribution of a property that is a personal residence (the "Property"), to the beneficiaries of a trust that is a "personal trust" as defined in subsection 248(1) of the Act (the "Trust"). Specifically, you have requested our views on two issues.
In a situation where there are multiple beneficiaries and only one is a specified beneficiary' (as defined in subparagraph (c.1)(ii) of the definition of "principal residence" in section 54 of the Act), and in the event the Property is distributed in equal proportions to all the beneficiaries in satisfaction of their capital interest in the Trust:
(i) Where the Trust elects under subsection 107(2.01), would the election be considered invalid due to the fact that the property was distributed pursuant to subsection 107(2) to all the beneficiaries and not just to the one specified beneficiary of the Trust?
(ii) Where the Trust does not elect under subsection 107(2.01), and distributes the Property pursuant to subsection 107(2) to all the beneficiaries in equal proportion, can each beneficiary claim a principal residence deduction pursuant to paragraph 40(2)(b) of the Act?
Our Comments
Written confirmation of the tax implications inherent in actual proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, entitled Advance Income Tax Rulings', dated May 17, 2002. This Information Circular and other Canada Revenue Agency publications can be accessed on our website at http://www.cra-arc.gc.ca. Your request was not submitted as an advance income tax ruling request, however, as stated in paragraph 22 of IC 70-6R5, we do provide written opinions on general enquiries and we are prepared to provide you with the following comments.
Subsection 107(2) generally applies where a personal trust or a trust described in section 4800.1 of the Income Tax Regulations (i.e., a prescribed trust), distributes property to a beneficiary in satisfaction of all or part of the beneficiary's capital interest in the trust. Subsection 107(2.01) allows a personal trust to elect to be treated as if it had disposed of, and reacquired, a principal residence at its fair market value immediately before distributing the property to one of its beneficiaries under subsection 107(2). Subsection 107(2.01) is designed to allow a personal trust to take advantage of the principal residence exemption.
Pursuant to paragraph (c.1) of the definition of "principal residence" in section 54, a personal trust can generally designate a particular housing unit it owns as a principal residence for a taxation year, provided, inter alia, there are one or more beneficiaries, each known as a specified beneficiary of the trust for the year, who are beneficially interested in the trust, and who ordinarily inhabited the particular housing unit, or whose spouse, common-law partner, former spouse or common-law partner or child ordinarily inhabited the housing unit. The existence of other beneficiaries of the trust, who are not specified beneficiaries of the trust or members of their extended families, would not preclude the trust from designating an eligible property it owns as a principal residence.
In the first scenario, your concern is, based on the wording of subsection 107(2.01), i.e., "Where property that would, if a personal trust had designated the property under paragraph (c.1) of the definition "principal residence" in section 54,
is at any time
distributed by the trust to a taxpayer
", whether a distribution of the Property to multiple beneficiaries instead of a single beneficiary, would invalidate the election under subsection 107(2.01). In this regard please note that subsection 33(2) of the Interpretation Act, R.S.C. 1985, c. I-21, provides that "words in the singular include the plural, and words in the plural include the singular." Accordingly, in our view, the distribution of the Property in the given instance to multiple beneficiaries will not invalidate the election pursuant to subsection 107(2.01).
In the second scenario, if the Trust chose not to elect under subsection 107(2.01) and distributes the Property to all the beneficiaries pursuant to subsection 107(2), it is a question of fact whether the portion of the Property distributed to each beneficiary qualifies as the beneficiary's principal residence. As explained in paragraph 2.9 of the Income Tax Folio S1-F3-C2: Principal Residence, for the purposes of claiming the principal residence deduction exemption in respect of a property, the taxpayer could own the property "jointly with another person or otherwise". Such ownership could include sole ownership, joint tenancy and tenancy-in-common. Each beneficiary must, in his/her own right, satisfy the requirements of subparagraph 40(2)(b) and paragraph (c) of the "principal residence" definition.
Further, please be aware that in the second scenario the provisions of subsection 40(7) of the Act will apply which provides that, for the purposes of paragraph 40(2)(b), where the residence is acquired by a beneficiary in satisfaction of a part of his or her capital interest in the trust, he or she shall be deemed to have owned the residence continuously since the trust last acquired it. Thus, the acquisition date used to determine the number of taxation years mentioned in factors B and C in paragraph 40(2)(b), will be the date of acquisition by the trust.
We also suggest that you refer to the detailed discussion on principal residence in Income Tax Folio S1-F3-C2 to assist you in making the determination.
We trust our comments will be of assistance to you.
Yours truly,
Phil Kohnen
For Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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