On October 3, 2016 the Minister of Finance announced a series of tax measures relating to the principal residence exemption. The October 3 measures had not been implemented when the government introduced its budget on March 22, 2017. As part of that budget, the government confirmed its intention to move forward with the October 3 measures. The budget implementation bill was released on October 25, 2017, and includes some substantive changes to the original measures relating to the principal residence exemption.
In their original form, the October 3 measures restricted the types of personal trusts that are eligible to claim the principal residence exemption. Specifically, the measures provided that, if a personal trust disposes of real property after 2016, only the following trusts will be eligible to claim the principal residence exemption for the portion of the gain that arises after 2016:
- alter ego trusts, spousal or common-law partner trusts, joint spousal or common-law partner trusts, and self-benefit trusts;
- qualified disability trust; and
- trusts for the benefit of a minor whose parents are both deceased, if the trust was settled by one of the minor’s parents.
In addition, the above “eligible trusts” must have a “specified beneficiary” in the year and, if the trust acquires the property on or after October 3, 2016, the trust must provide the specified beneficiary with the right to the use and enjoyment of the property.
In the budget implementation bill released on October 25, 2017, the legislation no longer includes the requirement that, where a property is acquired by an eligible trust on or after October 3, 2016, the terms of the trust must provide the specified beneficiary with a right to use and enjoy the property. That is a positive amendment for already existing trusts that do not contain the required language.
The new legislation also relaxes, albeit modestly, the requirements for a trust for minors. The requirement that both parents of the minor be deceased before the beginning of the year has been changed so that the trust will qualify if either both parents are deceased or the trust arose before the beginning of the year as a consequence of the death of a mother or father of the minor beneficiary. In other words, under the new rules a parent can establish a testamentary trust (but not an inter vivos trust) for a minor child and that trust will be an eligible trust while the child is a minor (provided the other requirements are met), even if the other parent is still alive. The question is, how often will this be used? It’s possible this was meant to capture the case of divorced or separated spouses, but in many cases the minor child will not remain in the deceased parent’s home but rather live with the surviving parent. The usefulness of this amendments remains to be seen.
 In category (1), the specified beneficiary is the life interest beneficiary, in category (2) the specified beneficiary is the “electing beneficiary” under the qualified disability trust, and in category (3) the specified beneficiary is the minor beneficiary.