Bill C-63 includes changes to the principal residence exemption rules for trusts.
The bill, which received first reading on October 27, 2017, includes amendments to the rules for when a trust is eligible to claim the principal residence exemption, but makes certain changes to the measures that were originally proposed in a previous Notice of Ways and Means Motion (NWMM). Specifically, Bill C-63 relaxes the eligibility requirements for a trust settled by a parent of a minor child, to allow a home held by the trust to still qualify as a principal residence even if both parents are not deceased. In addition, the bill does not reflect certain provisions from the NWMM that required an eligible trust's terms to specifically provide a particular beneficiary with a right to the use and enjoyment of the property as a residence throughout the period in the year that the trust owns the property. These rules are generally effective for trust years beginning after 2016.
In general, the principal residence exemption can eliminate or reduce the capital gain on the disposition of a taxpayer's principal residence. The formula to calculate the gain from the disposition of a principal residence is included in paragraph 40(2)(b) and the principal residence definition in section 54 sets out the requirements for a property to qualify as a taxpayer's principal residence for a taxation year.
Only individuals and personal trusts are eligible to claim the principal residence exemption. In the case of a personal trust, the conditions in paragraph 54(2)(c.1) of the "principal residence" definition in section 54 must be met in order for a property to qualify as the trust's principal residence.
In particular, the trust must designate the property, in prescribed form, as its principal residence for the taxation year and identify each individual who is a "specified beneficiary" of the trust for the year. Generally, a specified beneficiary is an individual who is beneficially interested in the trust and who ordinarily inhabited the residence or has a spouse or common-law partner, former spouse or common-law partner or child who ordinarily inhabited the residence.
Finance released a NWMM on October 3, 2016 to include proposed additional requirements for trusts to claim the principal residence exemption for a taxation year that begins after 2016.
Principal residence changes
The bill largely reflects the measures in the NWMM to amend the definition of "principal residence" to include new subparagraph 54(2)(c.1)(iii.1), which generally requires that the trust be an eligible trust, and that one of its beneficiaries (who is a specified beneficiary of the trust for the year) be resident in Canada for the relevant year.
Specifically, in order for a housing unit held by a personal trust to qualify as a principal residence after 2016, the trust must fall into one of three categories (certain alter ego and spousal/ common-law partner trusts, qualified disability trusts, and inter vivos or testamentary trusts, settled by a parent for a minor child).
However, the measures included in the bill are not identical to those included in the NWMM.
Bill offers relief for trusts that arise on consequence of death
The bill now provides that where a trust is settled by a parent for a minor, the trust's housing unit may still qualify as a principal residence in situations where both parents aren't deceased, provided the trust arose before the beginning of the year on and as a consequence of the death of either the mother or the father of the minor. Previously, the NWMM required that both parents of the minor child had to be deceased in order for the property held by the trust to qualify as a principal residence in a year, under Clause 54.1(c.1)(iii.1)(C)(I). This change appears to address concerns from the tax community about the NWMM proposals.
Bill drops rules on trust terms providing right to the use the housing unit
Bill C-63 does not include proposed amendments in the NWMM that required the terms of the trust to provide the specified beneficiary with a right to the use and enjoyment of the housing unit as a residence throughout the period in the year in which the trust owns the property for the trust's property acquired on or after October 3, 2016 to qualify as a "principal residence" (i.e., the bill does not include clauses 54(c.1)(iii.1)(A)(III), (B)(III) or (C)(II) in the definition of "principal residence" that were in the NWMM).
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