New Rules for Principal Residences Held in Trusts

Along with the sweeping changes to require individuals to report the disposition of their principal residences after 2015, changes to the rules for trusts that own property that is the principal residence of a beneficiary have also changed.  Be prepared to discuss changes in eligibility and to get valuations of property done now.

Until 2016, the principal residence exemption was available to trusts if the following conditions were met:

• No beneficiary of the trust is a corporation
• The trust designates a beneficiary (or their spouse, common-law partner or child) who ordinarily inhabits the residence (called the “specified beneficiary”)
• The specified beneficiary does not designate another property as their principal residence.

After 2016, the principal residence exemption is only available to the following trusts:

• An alter ego trust
• A spouse or common-law partner trust
• A joint spouse or common-law partner trust
• A trust where a minor child of the settlor is a beneficiary and is resident in Canada
• A Qualified Disability Trust

All other trusts that provided a residence to a beneficiary will be deemed to have disposed of that property on December 31, 2016 at its fair market value and immediately re-acquired it.  The trust will be able to claim the principal residence exemption for years prior to 2016 by filing form T1079: Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust).  Any gains accrued after December 31, 2016 will no longer be eligible for the principal residence exemption.

Advisors who have clients with trusts holding principal residences that are not one of the type of trusts listed above should advise their clients to have the value of the property determined as of December 31, 2016 in order to report the deemed disposition and determine the adjusted cost base of the property.  This amount will be needed when the property is disposed of after 2016.

As the principal residence exemption will not be available on gains accruing after 2016, it would also be prudent to determine whether the property should remain in the trust.

Walter Harder, DFA-Tax Services Specialist™ is a Master Instructor with Knowledge Bureau and author of the certificate course T3 Basic Tax Preparation.

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