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Broader Principal Residence Exemption for trusts

Broader Principal Residence Exemption for trusts

Finance recommends broader access to the Principal Residence Exemption for certain trusts


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In a recent comfort letter, Finance states it will recommend amending the Income Tax Act to allow certain inter vivos trusts to be eligible to claim the principal residence exemption. Specifically, this change accommodates inter vivos trusts with a beneficiary who is a Canadian-resident individual eligible for the Disability Tax Credit (DTC). Finance recommends the amendment be applied to taxation years beginning after 2016.

This is welcome relief for taxpayers in light of the amendments to the definition of "principal residence". These amendments limit the eligibility of trusts claiming the principal residence exemption to three particular categories of trusts (which includes qualified disability trusts that are testamentary trusts), effective for taxation years of trusts that begin after 2016.


Individuals and certain personal trusts are eligible to claim the principal residence exemption, which can eliminate or reduce the capital gain on the disposition of their principal residence.

For a property of a personal trust to qualify as a "principal residence" in a taxation year beginning after 2016, among other requirements, the personal trust must be an eligible trust and one of its beneficiaries (who is a specified beneficiary of the trust for the year) must be resident in Canada in the year.

Families often establish inter vivos trusts (generally a trust that is created during the lifetime of the settlor and is not a testamentary trust) to hold property, including a housing unit, for the benefit of an individual who is DTC-eligible. Under the current rules, these inter vivos trusts may not qualify as eligible trusts and may not be eligible to claim the principal residence exemption.

Finance's comments

Finance agrees it is appropriate for certain inter vivos trusts (i.e., those that have been established for the benefit of an individual who is DTC-eligible) to be allowed to claim the principal residence exemption. Specifically, Finance states it would recommend amending the definition of "principal residence" to allow a trust to designate a property as a principal residence for a taxation year, so long as the trust meets the following conditions:

  • A beneficiary of the trust is an individual resident in Canada during the year who is eligible for the DTC
  • The beneficiary is a child, spouse, common-law partner, or former spouse or common-law partner of the settlor of the trust
  • No person other than the beneficiary who is eligible for the DTC may receive or otherwise obtain income or capital of the trust during the beneficiary's lifetime
  • All other designation requirements (including requirements related to the occupation of the property and one property per family unit) in paragraph 54(c.1) of the "principal residence" definition are fulfilled.

Finance also states that it recommends that the amendment apply to taxation years beginning after 2016.

For more information, contact your KPMG advisor.

Information is current to December 10, 2019. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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