The ability to shelter from tax all or part of a gain on an individual’s principal residence is a long-standing cornerstone of Canadian tax policy. In certain circumstances, rules in the Income Tax Act (“the Act”) may extend this opportunity to real estate, owned through a Canadian resident personal trust. Certain estate planning and other advantages can arise by owning Canadian real estate through a trust.
The same criteria that apply to individuals apply to trusts in determining whether a property will qualify as a principal residence, including limitation of one property being designated for any given year, size and type of the qualifying property, and the “ordinarily inhabited” rule. Certain additional criteria must be met for a trust to be eligible to make this designation, including the need for the trust to be a Canadian resident “personal trust” as defined in the Act and no partnership or corporation being beneficially interested in the trust in any year for which the designation is made.
In order to designate a property as a principal residence of the trust, there must be at least one “specified beneficiary” of the trust for the respective year. “Specified beneficiary” is a defined term in the Act, which broadly includes any person who is beneficially interested in the trust and either ordinarily inhabited the property in the particular year, or who had a spouse or common-law partner, former spouse or common-law partner, or minor child who ordinarily inhabited the property. Property designated in this way by the trust is deemed by the Act to be designated as the principal residence for each specified beneficiary of the trust for each year in question. This provision could inadvertently impair the ability of many unwitting beneficiaries and their spouses to make their own principal residence designations.
The Canada Revenue Agency (“CRA) has an administrative policy whereby individuals are only required to file the prescribed principal residence designation form when there is a taxable component to the gain on disposition (see Tax Tip 06-24)
This administrative waiver does not extend to trusts. The trustee must file a form T1079 Designation of Property as a Principal Residence by a Personal Trust when the designation is made by the trust, regardless of whether or not there is a taxable gain. As there is nothing in the Act enabling a trust to late-file this designation, the CRA may simply deny a late designation by a trust outright, thereby exposing the entire gain to tax.
An opportunity arises for non-residents of Canada to potentially avail themselves of the benefits of the principal residence exemption where real property is “ordinarily inhabited” by a non-resident specified beneficiary of a Canadian trust. It should be noted that for these purposes the periods of residency in any particular year can be very limited while still meeting the definition of “ordinarily inhabited.”
There can be advantages to owning a principal residence in a trust. However, accessing the exemption through a trust is not always possible and the pitfalls must be understood. If you have any questions regarding the principal residence designation by a trust or an individual, please contact your TSG representative.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.