Changes to the Principal Residence Exemption Rules for Trusts

The well-known principal residence exemption rules permit a taxpayer to shelter the sale of property that is an individual’s residence. To address perceived loopholes surrounding the capital gains tax exemption, the Government of Canada introduced measures near the end of 2016 on the reporting and claiming of property as a principal residence. These new rules restrict the ability of a personal trust to designate a property held in the trust as a principal residence for tax purposes.

Previously, almost any “personal trust” could designate a property as its principal residence for a year, provided the trust designated each beneficiary of the trust who ordinarily inhabited the property as a principal residence in the year, or whose spouse, common-law spouse or child did. Under the previous rules the trust itself, but not the relevant occupant of the property, had to be resident in Canada to claim the principal residence exemption.

In order for a trust to be eligible to make a principal residence designation for dispositions in taxation years after 2016, the actual occupant of the property must be a beneficiary of the trust and a resident of Canada in the year. Furthermore, the trust must be one of the following types: a spousal or common-law partner trust, joint spousal or common-law partner trust, alter ego trust, a trust for the benefit of a minor child whose parents are deceased, or a Qualified Disability Trust. In addition, if the property in question was acquired on or after October 3, 2016, then the trust must expressly provide that certain beneficiaries have a right to use and enjoy the property as a residence. In the case of Qualified Disability Trusts, it is the beneficiary who receives the disability tax credit (i.e. the electing beneficiary) who must have the express right to the use of the property.

Certain allowances have been provided for to help ease into the transition to the new rules. For instance, certain trusts may use the existing principal residence rules to shelter gains accrued up until the end of 2016. Additionally, a taxpayer who fails to report a disposition can file an amended return to correct the failure, and the three year limitation period will begin to run from the day that amended return is filed. Nevertheless, those unsure about the applicability of the new rules should speak to their advisors about their tax obligations when it comes to disposing of capital property.