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.
whether a discretionary beneficiary of a personal trust can claim a separate p/r from the personal trust if the home belonging to the personal trust is occupied by an adult child
Reasons FOR POSITION TAKEN:
54(g)(iii.1)(D) & 54(g)(vi) were worded to prevent anyone from benefiting directly or indirectly from 2 p/r's and so that a parent could claim a p/r designation for occupation by adult child
June 2, 1994
Re: Principal Residence for a Personal Trust
We are replying to your letter of November 22, 1993 concerning a personal trust's ability to designate a particular property as a principal residence. We apologize for the delay in our response. Unless otherwise stated, all statute references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the "Act").
Recent changes to paragraph 54(g) of the Act permit a personal trust as defined in subsection 248(1) of the Act to designate a property as a principal residence in certain circumstances. You ask us to confirm your understanding that the principal residence designation will not be available to a personal trust where an adult child of a discretionary beneficiary of the trust inhabits the dwelling and the discretionary beneficiary claims some other property as a principal residence. You ask why this should be so when the adult child could claim a separate principal residence from the parent if the residence was held directly by the adult child.
Clause 54(g)(iii.1)(D) and subparagraph 54(g)(vi) of the Act prevent a personal trust and its specified beneficiaries (or a member of the specified beneficiaries' family unit) from claiming more than one principal residence among themselves in a taxation year. While the family unit does not generally include an adult child or a married child, an individual who is beneficially interested in the trust will be considered to be a specified beneficiary if the housing unit held by the trust is inhabited by the child of that individual regardless of the age or marital status of the child. For greater certainty, subsection 248(25) of the Act affirms that an individual whose right to the income or capital of a trust is discretionary is beneficially interested in a trust for the purposes of the Act.
Accordingly, where any child of a person beneficially interested in the trust inhabits the property in question, the trust will not be entitled to designate that property as a principal residence for any year in which that parent designates another property as a principal residence. Alternatively, if the personal trust designates the property as a principal residence for a particular year or years, the parent will be precluded from making a designation in respect of any other property for that taxation year.
One of the reasons why the reference to child in subclause 54(g)(iii.1)(B)(II) of the Act is not restricted to an unmarried child under the age of 18 is that the description in subparagraph 54(g)(i.1) of who must occupy a residence in order for it be eligible to be designated as a principal residence by a personal trust is similarly unrestricted. The unrestricted use of the word child in subparagraphs 54(g)(i) and (i.1) of the Act permit an individual greater flexibility in using the designation. For example, the principal residence designation could be used by an individual in a nursing home who wishes his or her adult children to occupy the family home for an indefinite period rather than sell it. Furthermore, it would not be appropriate if an individual was to directly or indirectly benefit from two principal residence designations in one taxation year. If subclause 54(g)(iii.1)(B)(II) of the Act was restricted to an unmarried child under the age of 18, the parent who was beneficially interested in the capital appreciation of the trust could benefit from a designation by the personal trust as well as from a designation of a property owned directly.
It should also be noted that where a personal trust is entitled to designate the property as a principal residence by reason of subparagraph 54(g)(ii) of the Act, a specified beneficiary will include anyone who is beneficially interested in the trust regardless of who inhabits the housing unit.
Your second question concerns the various provisions in sections 104 and 107 of the Act which set out the circumstances under which a trust is deemed to have disposed of its property for an amount equal to the fair market value and reacquired it at the same value. You are concerned about the valuation of shares of a corporation which owns a life insurance policy. Where such shares are held by an individual directly and the individual dies, subsection 70(5.3) of the Act provides that, for the purposes of subsections 70(5),(9.4) and (9.5) of the Act, the fair market value of those shares immediately before the death of the individual will be determined as though the fair market value of the life insurance held by the corporation was equal to the cash surrender value of the policy as determined under paragraph 148(9)(b) of the Act. You note that there is no similar provision covering the situation where the shares are held by a trust and ask whether we have adopted an administrative position with respect to the deemed dispositions required under sections 104 and 107 of the Act.
We confirm that there are no provisions applicable to section 104 or 107 of the Act comparable to subsection 70(5.3) which would limit the amount of the fair market value of an insurance policy and thus the fair market value of the shares of the corporation which holds the policy. Accordingly, the fair market value of the insurance policy and correspondingly, fair market value of the corporate shares would be determined in accordance with normal valuation practices taking into account all facts relevant to the particular case. In this regard, we refer you to paragraph 4 of Interpretation Bulletin IT-416R3 "Valuation of Shares of a Corporation receiving Life Insurance Proceeds on the Death of a Shareholder" and paragraph 40 of Information Circular 89-3 "Policy Statement on Business Equity Valuations".
We trust our comments will be of assistance to you.
Business and General Division
Legislative and Intergovernmental
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