27 April 2011 External T.I. 2010-0368141E5 - Principal Residence - Trust & 1/2 hectare rule

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: With respect to determining whether the land in excess of one-half hectare was regarded as necessary to the use and enjoyment of the housing unit as a residence, can the factors utilized on the deemed disposition of the residence upon the mother's death be attributed to the same determination when the residence is disposed of by the mother's estate?

Position: Generally, no.

Reasons: The personal trust created upon the death of an individual is a separate entity from the deceased individual for tax purposes. Therefore the factors utilized upon disposal of the property by the trust are limited to those relevant to the period of time that the trust is in existence except where specifically allowed under the Act. There are no exceptions given the facts presented in this case.

XXXXXXXXXX
				2010-036814
				W. Doiron

April 27, 2011

Dear XXXXXXXXXX :

Re: Principal Residence Exemption

This letter is in response to your letter requesting an opinion on whether land in excess of one-half hectare was necessary for the use and enjoyment of a housing unit acquired by an estate for purposes of the principal residence exemption. In your letter, you provided the following facts:

• A 5 acre parcel of land with a house (the "Property") was purchased by a couple in 1956 as their principal residence.
• The minimum lot size permitted for the parcel at the time of purchase was 5 acres.
• The Property was used solely as a residence (no business activity).
• In 1985, the couple's daughter and her husband moved into the home to care for her then widowed mother.
• In 1985, the Property could not be split into 2 between the daughter and son due to septic field restrictions of the provincial health department.
• About 5 years ago, the municipality would permit lot development in the area according to the official community plan however there was no sewer in the area until 2007.
• In 2007, the mother died and the deemed disposition of the subject Property was treated entirely as her principal residence. The land in excess of one-half hectare was regarded as necessary to the use and enjoyment of the housing unit as a residence by virtue of the minimum lot size required at the time of purchase.
• The daughter and her husband have continued to live in the home while the Property has been held by her mother's estate.
• The intention is that the Property will be sold by the estate as one parcel to a development company.

Based on these facts, you have posed the following question:

With respect to determining whether the land in excess of one-half hectare was regarded as necessary to the use and enjoyment of the housing unit as a residence for the purposes of the principal residence exemption, can the factors utilized on the deemed disposition of the residence upon the mother's death be attributed to the same determination when the residence is disposed of by the mother's estate?

With respect to your specific question, we have the following comments.

At the point of the mother's ("Individual's") death, subsection 70(5)(a) of the Income Tax Act (the "Act") states that the Individual is deemed to have disposed of each capital property at fair market value ("FMV") immediately before death. In addition, a personal trust ("Estate") is generally created. Paragraph 70(5)(b) of the Act states that the Estate would be deemed to have acquired the Property at the FMV immediately before the death of the Individual. Under paragraph 40(2)(b) of the Act, the Property can qualify as a principal residence of the Estate if it meets the requirements under section 54 of the Act for the purpose of claiming the personal residence exemption. Paragraph 35 of IT-120R6 discusses the application of the principal residence exemption with respect to personal trusts.

For tax purposes, the Estate is deemed to be an individual under subsection 104(2) of the Act. Accordingly, the taxation of the Estate is separate from the taxation of the Individual prior to their death.

Where the 'taxpayer' referred to in the definition of "principal residence" in section 54 is a personal trust, paragraph 54(a.1) of the principal residence definition under the Act requires that the housing unit be ordinarily inhabited by a "specified beneficiary" of the trust or by the spouse or former spouse or a child of a specified beneficiary. In order to qualify as a "specified beneficiary", a person must be an individual who is "beneficially interested" in the trust and the person must ordinarily inhabit the housing unit or have a spouse or former spouse or child who ordinarily inhabits it. The term "beneficially interested" is defined in subsection 248(25) of the Act as a person that has the right as a beneficiary under the trust to receive income or capital of the trust. While not specifically stated in your letter, it is presumed that the daughter is a beneficiary of the Individual's estate. As a result, the daughter would be considered a 'specified beneficiary' and the Property could be considered the principal residence of the Estate.

Given that the Property would still be 5 acres in size at the time of disposal by the Estate, it is a question of fact whether the land in excess of one-half hectare surrounding the house would be considered necessary to the use and enjoyment of the housing unit as a residence as required under paragraph 54(e) of the principal residence definition (the "Determination"). As stated above, the taxation of the Estate is separate from the taxation of the Individual therefore the factors relevant to the Determination by the Estate are limited to the facts in place subsequent to the death of the Individual.

With respect to the Determination prior to the Individual's death, it is likely that the minimum lot size requirement of 5 acres at the point of acquisition in 1956 would be a key factor in determining whether the excess land was necessary for the use and enjoyment of the housing unit as a residence during the time owned by the Individual. However, with respect to the Determination in relation to the Estate's deemed acquisition, the minimum lot size and severance restrictions in place in 1956 are no longer a factor and it would appear that there were no laws or regulations prohibiting the severing of the excess land during any point of ownership by the Estate. The specific determination in relation to the Estate is a question of fact but it would appear based on the information provided that the land in excess of half a hectare would not be considered part of the principal residence of the trust.

If the Estate claims the Property as its principal residence, paragraph 54(f) of the principal residence definition deems the principal residence of the trust to also be the principal residence of each of the specified beneficiaries. Therefore, none of the specified beneficiaries are able to claim the exemption on another property during that period. The Estate must also file a form T1079 with the trust's tax return for the year in which the disposition or deemed disposition by the trust occurs.

If the Property is not sold by the Estate but instead is transferred to the beneficiary and subsequently sold by the beneficiary, subsection 40(7) of the Act provides a deeming rule where for the purposes of the principal residence exemption, the beneficiary is deemed to have owned the property since the Estate acquired the Property.

We trust these comments will be of some assistance.

Yours truly,

Steve Fron
Acting Manager
International & Trust Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch