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: Whether a trust must file Form T1079 and T1079-WS annually with the Trust T3 Return. Whether a T3 should be filed annually when there is no income earned in the trust.
Position: Form T1079 and T1079-WS should be filed with the T3 in the year in which the disposition or deemed disposition of the principal residence occurs. A T3 return must be file under certain circumstance (as listed below).
Reasons: As per T3 Trust Guide T4013
XXXXXXXXXX
2010-038489
Andrea Boyle, CGADecember 7, 2010
Dear XXXXXXXXXX :
Re: Principal Residence Exemption for Specified Beneficiaries
I am writing in reply to your fax dated October 25, 2010, in which you asked for clarification of the reporting requirements for a residence to be designated by a trust as a principal residence.
Specifically, you have indicated that two individuals have lived in a residence both before and since their grandfather's death and will continue to do so until the residence is sold at some time in the future. This residence is to be transferred to a trust and these two individuals are the only specified beneficiaries of the trust. You have asked whether a T3 Trust Return should be filed annually, even though there will be no income earned in the trust. Further, you inquired whether Forms T1079 Designation of a Property as Principal Residence by a Personal Trust and T1079-WS Principal Residence Worksheet need to be filed annually with a T3 Trust Return.
The particular situation outlined in your fax relates to a factual one, involving specific taxpayers. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
Generally, a housing unit may be designated as a principal residence of a personal trust that is resident in Canada for each year in which the property is 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", a person must be "beneficially interested" in a trust. This would include any person that has a right as a beneficiary under a trust to receive income or capital of the trust, including a person who has the right to reside rent-free in a housing unit owned by the trust. The person beneficially interested also has to ordinarily inhabit the housing unit or have a spouse or common-law partner, former spouse or common-law partner or child who ordinarily inhabits the housing unit. Whether or not an individual is "beneficially interested" in a trust and whether a person ordinarily inhabits a housing unit are questions of fact that can only be determined upon a review of all the facts by a Canada Revenue Agency Tax Services Office.
Where a personal trust designates a property as its principal residence for a particular taxation year, the property is deemed to be property designated, for the calendar year ending in the year, as the principal residence of each specified beneficiary of the trust; the specified beneficiary or a person who throughout the calendar ending in the year was a member of such a beneficiary's family unit cannot designate another property as his/her principal residence for that year.
If the property qualifies as the personal trust's principal residence for one or more taxation years in which the personal trust owned the property, the principal residence exemption may be used to reduce or eliminate any capital gain which would otherwise be required to be included in the personal trust's income as a result of the disposition of the principal residence.
Requirement to File T3
The T4013 T3 Trust Guide 2009 provides information on the requirement to file a T3. This document is available on the Canada Revenue Agency Web site at: http://www.cra-arc.gc.ca/E/pub/tg/t4013/README.html.
The section titled "Who should file" on page 3 of the guide indicates the circumstances under which a trust should file a return. Specifically a return should be filed if income from the trust property is subject to tax, and in the tax year the trust:
- has tax payable;
- is a Canadian resident and has either disposed of, or is deemed to have disposed of, a capital property or has a taxable capital gain;
- is a non-resident throughout the year, and has a taxable capital gain or has disposed of taxable Canadian property;
- is a deemed resident trust;
- holds property that is subject to subsection 75(2) of the Income Tax Act;
- has provided a benefit of more than $100 to a beneficiary for upkeep, maintenance, or taxes for property maintained for the beneficiary's use (for more information, see "Line 43 - Upkeep, maintenance, and taxes of a property used or occupied by a beneficiary" on page 20); or
- receives from the trust property any income, gain, or profit that is allocated to one or more beneficiaries, and the trust has:
- total income from all sources of more than $500;
- income of more than $100 allocated to any single beneficiary;
- made a distribution of capital to one or more beneficiaries; or
- allocated any portion of the income to a non-resident beneficiary.
Therefore, whether a T3 needs to be filed for a given year is a question of fact which depends upon whether any of the above circumstances are applicable for the personal trust in a given tax year. Assuming that none of the other above circumstances apply, it is possible that a T3 Trust Return will only need to be filed in the year in which the disposition of the principal residence occurs.
Forms T1079 and T1079-WS
Page 28 of the T3 Trust Guide discusses principal residences and indicates, amongst other things, that a personal trust only has to file Form T1079 with the trust's return for the year in which the disposition or deemed disposition of the principal residence occurs.
We trust that these comments will be of assistance.
Yours truly,
Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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