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:
1. Can a personal trust designate a housing unit as a principal residence if the life tenant does not have a right to income or capital of the trust?
2. Where a personal trust designates a housing unit as a principal residence, will such designation prevent the beneficiaries of the trust who do not live in that housing unit from designating their own housing units as principal residences?
Position:
1. Yes.
2. Generally, no.
Reasons:
1. The definition “beneficially interested” in a trust was amended in 1997 to an “inclusive” type of definition. Thus, it now may include persons who do not have a right to income or capital of the trust. A person who has a right to use property of a trust would generally be considered to be beneficially interested in the trust.
2. “Specified beneficiary” is defined in paragraph (c.1) of the definition of “principal residence” as an individual who is beneficially interested in the trust and (generally) ordinarily inhabited the housing unit. However, if the trust made an election under subsection 45(2) or (3), the term “specified beneficiary” is modified to include all individuals who are beneficially interested in the trust (whether or not they ordinarily inhabit the trust’s housing unit). Paragraph (f) of the definition of “principal residence,” which prevents another property from being designated by a beneficiary of the trust, applies only with respect to “specified beneficiaries.”
Subparagraph (c.1)(iv) of the definition of “principal residence” contains another exception that could apply to the situation at hand. If the individual who ordinarily inhabits the housing unit is not married or at least 18 years of age, siblings of the individual will not be able to designate another property as their principal residence if they are similarly not married or at least 18 years of age.
XXXXXXXXXX J.D. Brooks
980375
Attention: XXXXXXXXXX
November 2, 1998
Dear Sirs:
This is in reply to your letter of February 16, 1998 in which you requested our views with respect to the principal residence exemption that is available for personal trusts. You presented a hypothetical situation in which a personal trust will, on January 1, 1999, be deemed pursuant to subsection 104(4) of the Income Tax Act (the “Act”) to dispose of and reacquire its property at its fair market value. The trust owns a house which is occupied by a life tenant. Siblings of the life tenant are the capital beneficiaries of the trust.
Your apparent concern is whether a principal residence election by the trust will prevent the capital beneficiaries from making a principal residence election with respect to the houses that they live in.
Although you have asked for a technical interpretation, the situation presented appears to be an actual fact situation. Should this situation involve a trust for which it is desired to designate a particular housing unit as a principal residence, you may wish to submit all relevant facts and proposed transactions for a binding advance income tax ruling. We are, however, prepared to provide some general comments.
Where the “taxpayer” referred to in the definition of “principal residence” in section 54 of the Act is a personal trust, paragraph (a.1) of that definition requires the housing unit to be ordinarily inhabited by a specified beneficiary of the trust or by the spouse or former spouse or a child of the specified beneficiary. In order to qualify as a “specified beneficiary,” which term is defined in subparagraph (c.1)(ii) of the definition of “principal residence,” a person must be an individual who is “beneficially interested” in the trust. The term “beneficially interested” is defined in subsection 248(25) of the Act, and as it read prior to being amended in 1997, the term applied to a person only if that person had a right as a beneficiary under a trust to receive income or capital of the trust. In the hypothetical situation you described, if the life tenant had no right to receive income or capital of the trust, the life tenant would not have qualified as a specified beneficiary and thus the trust would not have met the requirement stated in paragraph (a.1) of the definition of “principal residence.” However, the amendment in 1997 to the definition of the term “beneficially interested” broadened the coverage by becoming an “inclusive” type of definition. The term now includes persons who can reasonably be considered to have a beneficial interest in a trust. It is our view that a life tenant would be considered to be “beneficially interested” in a trust that provided the tenant with the use of property, and thus such a trust would meet the requirement stated in paragraph (a.1) of the definition of “principal residence.”
Where a trust can designate a particular property as a principal residence, the issue then becomes one of determining the impact of such a designation on the beneficiaries of the trust. As noted above, the term “specified beneficiary” requires an individual to be beneficially interested in the trust. It also stipulates that (except where paragraph (b) of the definition of principal residence is relied on by the trust to enable it to designate the housing unit as a principal residence even though there has been a change in use of the property) the individual must ordinarily inhabit the housing unit or have a spouse or former spouse or child who ordinarily inhabited it. Thus, where paragraph (a.1) of the definition of “principal residence” is relied on, those beneficiaries who do not ordinarily inhabit the housing unit and do not have a spouse, former spouse or child who ordinarily inhabit the housing unit, will not be “specified beneficiaries.” Accordingly, since paragraph (f) of the definition of “principal residence” applies only with respect to specified beneficiaries of the trust, the siblings in your hypothetical example would generally not be prevented from making a principal residence election with respect to the housing units they ordinarily inhabit provided that they do not ordinarily inhabit the same housing unit as that of the life tenant. However, by virtue of subparagraph (c.1)(iv) of the definition of “principal residence,” this would not be the case for a sibling that was under 18 years of age and unmarried if the life tenant were also a person under 18 years of age and unmarried.
As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not an advance income tax ruling and consequently, is not binding on Revenue Canada.
We trust our comments will be of assistance to you.
T. Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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