26 May 1993 Income Tax Severed Letter 9231467 - Principal Residence

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 Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                                       May 26, 1993

        International Tax Group                        Trusts SECTION 
        1
97-1-1                                        C.R. Bowen
        North York D.O.                                (613) 957-8585
        Attention:  John Cunningham

                                                       923146

        Spousal Trust

We are writing further to your memorandum of October 22, 1992 and our telephone conversations of April 27 and 28 (Cunningham/Bowen), wherein you requested our comments on whether a spousal trust was created in a particular fact situation and whether a particular property distributed by a trust to its capital beneficiaries would meet the definition of principal residence in paragraph 54(g) of the Income Tax Act (the "Act").

Facts

Our understanding of the facts of the situation are as follows:
                             XXXXXXXXXX

                             XXXXXXXXXX

Your Opinion It is your opinion that the 2 children resident in Canada should report a capital gain from the sale of the Property in their 1992 income tax returns. The adjusted cost base of the Property to the children will equal the fair market value of the property at the time of their mother's death. As the trust does not meet the definition of a spousal trust, no principal residence election will be available to the trust in respect of the Property under paragraph 54(g) or subsection 107(2.01) of the Act.

Your Questions

Your questions are as follows:

1.      Does the trust created under the Will meet the
        requirements of a "spousal trust" defined in subsection
        70(6) of the Act?

2.      For the purposes of the coming into force provision for
        the amendments to paragraph 54(g) and subsection 107(2.01)
        of the Act contained in Bill C-92, when is the trust
        considered to have disposed of the Property—at the time
        of the husband's death or at the time the title to the
        Property was transferred to the capital beneficiaries?

3.      Will the Property meet the definition of "principal
        residence" in paragraph 54(g) of the Act and qualify for
        the election under subsection 107(2.01) of the Act?

4.      Can a late filed election be made for the principal
        residence designation? 

5.      Does the trust's principal residence election for the
        Property take precedent over the husband's right to make a
        principal residence election for his home in Florida?

6.      Does the fact that the title of the Property was
        registered in the name of XXXXXXXXXX-estate as opposed
        to the trustees of the trust adversely affect whether
        the Property was held in the trust?

Our Comments

We have answered your questions in the same order as they are posed above.

1.      It is our opinion that the Will did not create a spousal
        trust under subsection 70(6) of the Act since the title to
        the Property may be transferred, under certain
        circumstances, to XXXXXXXXXX children prior to her
        husband's death.  Therefore, persons other than the spouse
        may receive or obtain the use of the capital of the trust
        prior to the spouse's death.  In addition, the spouse is
        not entitled to receive the income of the trust. 
        However, the trust created will meet the definition of
        "personal trust" in subsection 248(1) of the Act since it
        is a testamentary trust (as defined in paragraph 108(1)(i)
        of the Act).

2.      Upon the death of XXXXXXXXXX, one would normally have
        expected that a final trust return would have been filed,
        a chosen date would have been determined by the executors
        (which would serve as the actual date of distribution for
        income tax purposes), a clearance certificate would have
        been obtained by the trustees, all property would have
        been distributed to the capital beneficiaries on a timely
        basis and the trust would have been wound up.  This
        procedure is outlined in 
IT-282R
.  The continuation of
        the trust and the absence of a clearance certificate
        appears unusual and you may wish to obtain representation
        from the trustees on these matters.  However, as
        indicated in paragraph 3 below, the trust will not be
        eligible for the principal residence designation
        regardless of when the Property was disposed of by the
        trust. 

3. & 5. If it is determined that the disposition of the Property
        by the trust to the beneficiaries occurs before 1991, the
        Property will not meet the definition of principal
        residence since it was not held in a spousal trust.
        Therefore, the election under subsection 107(2.01) of the
        Act will not be available.

        For dispositions occurring after 1990, in order for the
        personal trust to claim the Property as a principal
        residence (in accordance with paragraphs 54(g)(i.1) and
        (iii.1) as amended by Bill C-92), one of the conditions
        that must be met is that XXXXXXXXXX must be
        "beneficially interested" (as defined in the new
        subsection 248(25) of the Act) in the trust.  Even though
        he is entitled to use the Property on a rent free basis,
        it is our opinion that he will not meet the definition
        since he does not have any right to actually receive any
        of the income or capital of the trust.  Therefore, the
        principal residence election and the election under
        subsection 107(2.01) of the Act, as amended by Bill C-92,
        will not be available to the trust.

4.      As indicated on page 21 of the 1992 T3 Guide and Trust
        Return, in order to qualify for the principal residence
        exemption from capital gains, the principal residence must
        be designated by the trust on the form T1097 and filed
        with the T3 return for the year in which the disposition
        occurs.  Form T1097 will not available until after Bill C-
        92 has received royal assent.  However, as per subsection
        16(8) of Bill C-92, a trust disposing of property after
        1990 and on or before royal assent will have up to six
        months after royal assent to make the election.  Any
        questions concerning the late filing of that election can
        be addressed to Head Office T3 Programs Division,
        16th floor, 355 River Road, Ottawa.

6.      For the purposes of the Land Registration Reform Act and
        the Land Transfer Tax Act, the Will registered with the
        provincial land titles office forms part of the deed and
        the instructions in the Will form part of the chain of
        title to the Property.  Although there is a delay in
        registering the Property in the name of the Estate (which
        is an acceptable name to use in registering the Property)
        and a delay in registering the names of the capital
        beneficiaries, it does not negate the fact that the
        Property was held by the trust prior to its disposition.
We trust that our comments will be of assistance.

for Director Manufacturing Industries, Partnerships and Trusts Division Rulings Directorate Legislative and Intergovernmental Affairs Branch