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. Can a personal trust with multiple beneficiaries who are all beneficially interested in the trust, make a designation of a housing unit as a principal residence, where at least one, but not all beneficiaries, ordinarily inhabits the housing unit?
2. Can one of the beneficiaries of the trust who does not ordinarily inhabit the housing unit described in 1, designate another property as his/her principal residence?
3. Where a personal trust disposes of a property it owns, and designates the property as a principal residence, does the trust or the specified beneficiary declare the capital gain?
4. Does the same position as in 3. apply in respect to deemed dispositions under the 21 year rule?
Position:
1. Generally yes, provided no beneficiary that ordinarily inhabits the housing unit, nor any member of his/her extended family has designated another property as a principal residence.
2. Generally yes, provided the beneficiary owns the property, unless the beneficiary is a member of any specified beneficiary's extended family.
3. The trust, which owns the property, would generally declare the capital gain from the disposition (as reduced by any principal residence deduction), unless the capital gain was paid out to a beneficiary.
4. Yes
Reasons: 1. Definition of "principal residence" under section 54, in particular subparagraphs 54(c.1)(ii) and (iv).
2. Same as 1. also paragraph 54(f).
3. Same as 1, also subsections 104(13) and 104(21)
4. Subsections 104(4), 104(13) and 104(21)
XXXXXXXXXX
2011-041523
M. Allan
February 6, 2012
Dear XXXXXXXXXX :
Re: Principal Residence and "specified beneficiaries"
We are writing in response to your e-mail of July 27, 2011, in which you requested our position in respect to the following issues regarding the principal residence designation and specified beneficiaries:
1. Can a personal trust with multiple beneficiaries who are all beneficially interested in the trust, make a designation of a housing unit as a principal residence, where at least one beneficiary, but not all beneficiaries, ordinarily inhabits the housing unit?
2. Can one of the beneficiaries of the trust who does not ordinarily inhabit the housing unit described in 1, designate another property as his/her principal residence?
3. Where a personal trust disposes of a property it owns, and designates the property as a principal residence, does the trust or the specified beneficiary declare the capital gain?
4. Does the same position as in 3 apply in respect to deemed dispositions under the 21 year rule?
Our Comments
In order for a personal trust to designate a particular property it owns as a "principal residence" as defined under section 54 of the Income Tax Act (ITA) for a taxation year, certain requirements must be met under the legislation. These requirements are summarized in general in paragraphs 35 and 36 of IT-120R6 Principal Residence. We offer the following comments in regard to your questions:
1. A personal trust can generally designate a particular housing unit it owns as a principal residence for a taxation year, providing there is 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. A further condition is that no other property has been designated as a principal residence by any specified beneficiary of the trust for the year, nor by a member of that specified beneficiary's extended family as described in subparagraph 54(c.1)(iv) of the definition of principal residence. 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.
2. Where a personal trust designates a particular housing unit as a principal residence for a taxation year, each specified beneficiary of the trust will be unable to designate another property as his or her principal residence for the year, as a consequence of paragraph 54(f) of the definition of principal residence. A beneficiary of the trust who is not a specified beneficiary of the trust, is generally able to designate another housing unit that he or she owns as his or her principal residence for the year, providing such beneficiary is not a member of the extended family of any of the specified beneficiaries of the trust as described under subparagraph 54(c.1)(iv) of the definition of principal residence. This results because the trust would not have been able to designate a particular housing unit as its principal residence for a year in the first instance, had any such member of the extended family of a specified beneficiary of the trust designated another housing unit in the year as his or her principal residence
3. Under the definition of a principal residence contained in section 54, a principal residence must be owned, whether jointly with another person or otherwise in the year, by the taxpayer. A personal trust is a taxpayer that is taxed as an individual. Where the trust owns a property that qualifies as a principal residence, then it is the trust that designates the property as a principal residence under s. 54 of the Act. Any resulting capital gain upon the disposition of the principal residence, as reduced by any principal residence deduction, would normally be that of the trust. If the capital gain was paid out to a beneficiary, the beneficiary would normally be taxed on the capital gain under subsections 104(13) and 104(21) of the ITA. For more information, see paragraphs 3 to 5 of IT-381R3 Capital gains and losses and the flow-through of taxable capital gains to beneficiaries
4. Under subsection 104(4) of the ITA, a trust is required to recognize its accrued capital gains every 21 years. Where the trust owns a property that it designates as its principal residence, the same result as in 3 above applies in respect to the capital gain recognized.
We trust these comments will be of assistance.
Sharmini Ratnasingham
Assistant Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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