16 October 1996 External T.I. 9625675 - PRINCIPAL RESIDENCE EXEMPTION - TRANSFER TO 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.

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.

Principal Issues:

Transfer of property to trust by parents. Land not severable, ownership repercussions and eligibility for principal residence exemptions.

Position:

Since land is not legally severable, parents cannot retain beneficial ownership of only a portion of it. Disposition on transfer of property to trust. Any gain could be fully or partially offset by the principal residence exemption if applicable. Possibility of principal residence exemption for trust regarding the residence and necessary land.

Reasons:

Previous Correspondence 932942, IT's

									962567
XXXXXXXXXX							D. Zion

Attention: XXXXXXXXXX

October 16, 1996

Dear XXXXXXXXXX:

Re: Principal Residence Exemption

This is in response to your correspondence of July 25, 1996, concerning the gift of property to a trust and the availability of the principal residence exemption to the transferors.

You describe a situation in which a husband and wife jointly own a property on which their principal residence and necessary land form a portion of the total property. The husband and wife propose to gift the total property to a trust for the benefit of themselves and their adult children such that the trust would hold the principal residence portion of the property for the exclusive benefit of the husband and wife while the remainder of the property would be held for exclusive benefit of the children. Currently, the property cannot be legally subdivided in this manner.

You have requested our views as to whether a trust may hold the above described portions of the property for the benefit of the different beneficiaries even though the property is not legally subdividable, as well as whether or not the husband and wife would qualify for 100% of the principal residence exemption on the eligible portion of property assuming it is designated for all years of ownership.

A review of the particular trust agreement is necessary in order to determine the income tax implications inherent therein. Such a review would be made by your tax services office in respect of an existing situation, or by this office where a transaction is proposed and is the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R2. We nevertheless offer the following general comments which are based on the premise that a personal trust as defined in section 248(1) of the Act is in existence. Please note that we are not in a position to comment on your enquiry regarding the ability of a trust to hold described portions of the property for the benefit of different beneficiaries if the property is not legally severable, since this is a question of trust law.

Our Comments

It is our opinion that two essential elements of "ownership" in the context of a principal residence are the right of alienation and the right of possession. In the situation you have presented, we understand that these essential rights with respect to the principal residence and necessary land cannot be transferred or retained separate from the ownership of the rest of the property due to existing legal restrictions on subdivision. Since the total property cannot be severed, it is our further understanding that under property law, the portions of the property are inalienable and consequently, it is only the total property as a whole which can be made the subject of a trust. Given the lack of existence of both these two essential elements of "ownership," the parents could not be considered to retain beneficial ownership in that portion of the property which contains the residence and necessary land on the transfer of the total property to the trust. Consequently, the parents could not qualify, in their own right, for the principal residence exemption under these circumstance once the property has legally been transferred to the personal trust. It is the Department's view that the transfer of the property would result in a disposition pursuant to section 54 of the Act of the entire property. Pursuant to paragraph 69(1) of the Act, the deemed proceeds of disposition would be equal to the fair market value of the property thereby triggering a taxable gain or loss at the time of the transfer. The trust would then be deemed to have acquired the entire property at its fair market value at that time. It is possible that any capital gain resulting on the transfer could be partially or completely offset through the use of the principal residence exemption at the time of the transfer.

Pursuant to the definition of "principal residence" contained within section 54 of the Act, a personal trust as defined in subsection 248(1), may designate a property as a principal residence for the purposes of the principal residence exemption in certain circumstances. Assuming that the other relevant provisions of the definition of a principal residence have been met, the principal residence exemption may be available to the personal trust for a particular taxation year.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch