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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
XXXXXXXXXX 2003-003409
Attention: XXXXXXXXXX
September 19, 2003
Dear Sir:
Re: Principal Residence Designation by a Personal Trust
This is in reply to your letter of June 3, 2003 in which you request an advance income tax in order to establish the tax status of a particular property. Your letter was forwarded to us on August 8, 2003 by the Ottawa Technology Centre. Your letter sets out specific facts involving past transactions concerning the property at XXXXXXXXXX, and requests a "ruling" confirming your understanding of the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act") as it will apply to the future disposition of the property.
As explained in Information Circular IC-70-6R5 dated May 17, 2002, an advance income tax ruling is a written statement given by the Income Tax Rulings Directorate to a taxpayer stating how the CCRA will interpret and apply specific provisions of existing Canadian income tax law to a specific proposed transaction or transactions where the pertinent facts can be established. In order to process a request for an advance income tax ruling, we require all the information and documents listed in paragraph 16 of the circular, including the tax account number of the spousal trust, written evidence that you are authorized to act on behalf of the trust, a $535 deposit and an undertaking by you to pay such additional fees as may be applicable, a summary of all the relevant information, including the names and tax account numbers of all specified beneficiaries for each taxation year in which the trust intends to claim a principal residence exemption. Should you wish to proceed with an advance income tax ruling request please submit a request that complies with all the requirements set out in IC-70-6R5.
As further stated in paragraph 22 of the circular, the CCRA also provides technical interpretations of specific provisions of the Act and accordingly, we offer the following general comments in connection with your request. We hope these comments will be of assistance to you in determining the amount of gain, if any, that is required to be included in the income of the spousal trust on the disposition of the property formerly occupied by one of the beneficiaries. However, as stated in paragraph 22 of the circular, written opinions are not advance tax rulings and, accordingly not binding on the CCRA.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
Background
You provided us with the following information concerning the property in question. Prior to 1995, the property was owned by an individual who used it as his principal residence throughout the period in which he owned it. Upon his death in 1995, the property was transferred to a trust (the "Trust") in accordance with his will which provided that his spouse or common-law partner would have exclusive use of the property until her death at which time the property would be distributed among three residual capital beneficiaries. The spousal beneficiary continued to occupy the property until some time in 2002, when she moved in with her daughter for medical reasons. At that time, the Trust commenced to rent the property and paid all the net rental income to the spousal beneficiary as required under the terms of the will. No capital gain was reported by the Trust on the change of use of the property in 2002 either because of the principal residence exemption or because of an election under subsection 45(2). You would like our views on what part, if any, of the capital gain that is likely to be realized on the disposition, or deemed disposition, of the property would be required to be included in the Trust's income in the year of disposition.
Our comments are based on the following assumptions:
? the Trust is a testamentary trust and thus, a personal trust;
? the Trust is a post-1971 spousal or common-law partner trust in that no one other than the spousal beneficiary is entitled to any of the income or capital of the Trust while she is alive and the spouse is entitled to receive all the income earned by the Trust. Refer to Interpretation Bulletin IT-305R4, Testamentary Spouse Trusts, for additional information on the conditions that must be met in order to qualify as a post-1971 spousal or common law partner trust; and
? no one other than the spouse or the three capital beneficiaries is beneficially interested in the Trust within the meaning of subsection 248(25).
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 beneficiary of the trust or by the spouse or child of a beneficiary of the trust. 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. We refer you to IT-120R6, Principal Residence, as well as forms, T1079, Designation of a Property as a Principal Residence by a Personal Trust, and T1079-WS, Principal Residence Worksheet, for a detailed explanation of how to calculate the amount of the principal residence exemption.
Assuming that the legal representative of the deceased individual's estate did not elect out of subsection 70(6) on the transfer of property from the deceased to the Trust, subsection 40(4) will apply to deem the Trust to have owned the property throughout the period in which the deceased individual owned it and will deem the Trust to have designated it as its principal residence for each taxation year in which it would have been the deceased individual's principal residence if he had so designated it. The examples in paragraph 38 of IT-120R6 illustrate how the principal residence exemption is calculated for a post-1971 spousal or common-law partner trust.
When a property owned by a personal trust ceases to be used as the principal residence of any of the beneficiaries and the trust commences to use the property as an income producing asset, subsection 45(1) deems the trust to have disposed of the property and to have immediately reacquired it for proceeds and a cost equal to the property's fair market value at the time of conversion as stated in paragraph 25 of IT-120R6. Although any resulting gain on the deemed disposition would normally be eliminated by the principal residence exemption, any future appreciation in the value of the property will result in a taxable capital gain when the property is subsequently disposed of.
However, as explained in paragraphs 25 and 26 of IT-120R6, the capital gain realized as a result of the change in the use of the property can be deferred if the Trust makes an election under subsection 45(2). This election has the effect of ignoring the change in use of the property for tax purposes. The election also allows the Trust to designate the property as its principal residence for a maximum of four additional taxation years, provided that the property otherwise qualifies for each of those years. If the Trust is unable to designate the property as its principal residence for more than one of the years following the change in use of the property, the full amount of any capital gain realized on the ultimate disposition or death of the spousal beneficiary would not be fully eliminated by the principal residence exemption. The Trust may be unable to designate the property as a principal residence for a particular year if, for example, one of the specified beneficiaries of the Trust or a person who is a member of any of the specified beneficiaries' "family unit" as that term is described in paragraph 35(d) of IT-120R6, were to designate another property as his or her principal residence for any such year.
For the calendar year ending in a taxation year of the Trust in which any beneficiary of the Trust occupied the property, it is only those beneficiaries of the Trust who have either ordinarily occupied the residence during the calendar year or who have a spouse or child living in the residence that are considered to be specified beneficiaries of the Trust for that particular taxation year. For the calendar year ending in a taxation year in which no beneficiary ordinarily occupied the property, all beneficiaries of the Trust are considered to be specified beneficiaries of the Trust. Thus, for the taxation years in which none of the beneficiaries occupied the property, it is all the beneficiaries of the Trust and their respective "family units" that are precluded from designating any other property as a principal residence for each such year that the Trust makes the designation. Please note that form T1079 on which the principal residence designation by a personal trust is made requires the name and tax account number of all specified beneficiaries of the personal trust for each year in which the Trust intends to make a principal residence designation.
As a final comment, we draw your attention to the formula for computing the principal residence exemption found in paragraph of paragraph 8 of IT-120R6. The additional year in the numerator of the formula permits a taxpayer who was resident in Canada throughout the period in which the property was owned, or was deemed to be owned, by that taxpayer to fully exempt the capital gain on the disposition of such property provided that the taxpayer can and does designate the property as his, her or its principal residence for all but one of the taxation years in which the taxpayer owned, or was deemed to own, the property.
All publications referred to in this letter can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/menu/APAP_I-e.html. This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.
Yours truly,
T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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