All About Estates

The Principal Residence Exemption and Qualified Disability Trusts

I previously blogged about changes that could be made to the current qualified disability trust (“QDT”) rules to make them more flexible. In that blog I briefly referred to changes to the principal residence exemption that limit the types of personal trusts that can use the exemption, one of which is a QDT.

A QDT, like the other eligible trusts under the new principal residence rules, must have a “specified beneficiary”. In the case of a QDT, the specified beneficiary must meet three requirements. The specified beneficiary must be:

  1. a resident of Canada;
  2. an “electing beneficiary” under the QDT (i.e. a beneficiary who qualifies for the disability tax credit and elects with the trustee for the trust to be a QDT); and
  3. a spouse, common-law partner, former spouse or common-law partner, or child of the settlor of the trust.

In many cases the above requirements will not be problematic. It is probably true that in most instances where a person sets aside a specific property owned on death in a QDT, it is a gift to the person’s surviving spouse or a child of that person. However, that will not always be the case.

It is easy to imagine a scenario where grandparents, or an aunt or uncle, of a disabled adult person have greater financial means than the parents of the disabled person, and choose to establish a trust for the disabled beneficiary as part of their estate plan. It might be that the nature of the person’s disability is such that direct ownership of a residence is not prudent. If the trust established by the grandparent, aunt or uncle qualifies as a QDT, and either already holds or in the future acquires real property that otherwise qualifies as a principal residence, it is not clear why the gain on that property should be treated any differently than it would be if a deceased parent of the beneficiary had established the trust. If the purpose of allowing QDT’s to use the principal residence exemption is to provide support for disabled persons in the form of a tax benefit, it should be the fact of the disability that matters, and not the identity of the settlor.

The proposed changes to the principal residence exemption rules are currently making their way through Parliament (as part of Bill C-63, the budget implementation bill), and are now at third reading in the House of Commons. If they are passed in their current form, the settlor-based restrictions on whether a QDT can use the principal residence exemption can be added to the list of desirable reforms to the QDT regime.

About Darren Lund

Darren Lund is a member of the Trust, Wills, Estates and Charities Group in the firms Toronto office. Darren has expertise in a broad range of estate planning matters, including multiple wills, inter vivos trusts, disability planning, estate freezing, and planning for beneficiaries and assets outside Canada. Darren advises trustees and beneficiaries on all aspects of estate administration, both contentious and non-contentious, and his experience includes passing of fiduciary accounts, trust variations, post-mortem tax planning, and administering the Canadian estates of non-residents. He also speaks and writes on a variety of related topics such as estate planning for spouses and couples, inheriting overseas property and estate planning for persons with disabilities. He previously practised estates law at a large national law firm.

Email: dlund@fasken.com

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