Under the new rules, additional requirements were introduced where a trust
owns a principal residence (for the years that begin after 2016).
Essentially, only the following types of trusts are able to designate a
principal residence (where the trust has a “specified beneficiary” who is a
resident of Canada during the year(s) for which the PRE is being claimed):
* An alter ego trust, spousal or common-law partner trust, joint spousal or
common-law partner trust, or a similar trust for the exclusive benefit of
the settlor of the trust during his/her lifetime;
* A testamentary trust created under a will that is a qualifying disability
trust for which the beneficiary is a spouse, common law partner, former
spouse, former common law partner, or child; or
* A trust for the benefit of a minor child of deceased parents.
If you have a trust that owns a principal residence and does not meet the
above conditions, you can take advantage of transitional rules that will
allow the trust to crystallize the PRE for any accrued capital gain
relating to the property up to Dec. 31, 2016.
Essentially the trust will be deemed to have disposed of the property on
Dec. 31, 2016 (the trust can shelter the gain under the PRE up until that
date) and to have reacquired the property at a cost equal to the fair
market value on Jan. 1, 2017. However, you may want to reconsider keeping
the property in the trust for years after 2017, since it will no longer be
sheltered (whereas it can be sheltered if owned directly by a beneficiary).
The new rules allow a trust that does not qualify for the PRE to make a
tax-deferred distribution of the property to the beneficiary who had
ordinarily occupied the property (assuming the beneficiary has a capital
entitlement to the trust) and, for the purposes of accessing the PRE, the
beneficiary will be able to designate the property as his or her principal
residence for those years it was owned by the trust.
If the beneficiary who had ordinarily occupied the property does not have a
capital entitlement to the trust such that the property cannot be
distributed out to him or her, it may still be possible for the beneficiary
to take advantage of the PRE after 2016 if there is another way for the
beneficiary to become the beneficial owner of the property.
For example, the property could be distributed to a capital beneficiary of
the trust at fair market value (but this means that tax will be owing in
the trust to the extent of any increase in value of the property from Jan.
1, 2017, to the date of the distribution). The capital beneficiary in turn
gifts the property to the first-mentioned beneficiary (who ordinarily
occupies the property), who will then be able to designate the property as
his or her principal residence for the tax years after the gift is made.
Trusts are often used to hold a principal residence as part of a succession
and/or estate plan and as such, the planning we describe above might not be
appropriate in a number of situations; for example, where the beneficiary
is not equipped to control material wealth or where the property was
originally intended to be transferred to other beneficiaries.
If you kept the principal residence in a trust, any planning intended to
sidestep or mitigate the impact of the new rules should be carefully
reviewed by you and your advisors to ensure your original planning goals
are still being achieved. Furthermore, in considering such planning, you
should be mindful of any applicable land transfer tax, and structure the
distribution from the trust to ensure such tax is avoided or mitigated.
Changes to the “Plus One” rule.
Samantha Prasad, LL.B., is a Partner with Toronto law firm
Minden Gross LLP, a Meritas Law Firm Worldwide affiliate, and specializes in corporate,
estate, and international tax planning. She writes frequently on tax
issues, and is the co-editor of various
Wolters Kluwer Ltd. tax publications.
is an Associate in the Minden Gross Tax Group and focuses on corporate,
estate, and international tax planning.
This article is reprinted from
The Minden Brief – Winter 2017, © 2017 by Minden Gross LLP. Us
ed with permission.
© 2017 by Fund Library. All rights reserved. Reproduction in whole or in
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The foregoing is for general information purposes only and is the opinion
of the writer. This information is not intended to provide specific
personalized advice including, without limitation, investment, financial,
legal, accounting or tax advice.