All About Estates

A review of the use of a Principal Residence Exemption by a Trust

With Toronto’s real estate market being too hot to handle, clients more frequently are calling to review their estate plans in relation to their real estate holdings. Inevitably, such discussion occurs within the context of their overall planning, which may include the use of family trusts (i.e. inter vivos trusts for the benefit of family members). Nominee planning and other strategies and issues aside, a topic raised when considering the use of trusts to hold real estate is the use of the principal residence exemption (“PRE”) by a trust. This blog provides a refresher on the current tax measures relating to the use of the PRE by a trust and transferring a principal residence out of a trust, including planning opportunities available.

(1) Property Held in a Trust

If a residential property is  held in a trust, consider informing the client of the following,[1]  keeping in mind that similar to individuals, if a trust is able to designate a property as a principal residence following a disposition, such designation is in respect to one or more  particular years of ownership (including deemed ownership):

For taxation years prior to and including 2016

A trust only can claim the PRE in a year in which one of its beneficiaries includes a “specified beneficiary”. A specified beneficiary includes a beneficiary who, or whose qualifying family member, ordinarily inhabited the housing unit in that year.

If a trust designates a property as a principal residence in a given year, all specified beneficiaries and members of their respective family units will not be able to designate any other property as their principal residence for such given year. Thus, having a trust designate a property as its principal residence  may not be the most tax efficient planning strategy. For example, if specified beneficiaries (or their family unit members) personally hold other properties (prior to and/or including 2016), it may be more effective to permit them to claim the PRE on their respective properties (at least on as many as they can) for such years rather than having a trust claim the PRE on merely one property.

A trust cannot claim the PRE if any corporation (other than a charity) or partnership is a beneficiary of such trust.

A trust may sell the residential  property, protecting any gain (accrued prior to and including the 2016 taxation years) with the PRE and  hold or distribute the sale proceeds pursuant to the terms of the trust.

For taxation years beginning after 2016

There are limited circumstances in which an inter vivos trust can designate a property as a “principal residence” whereby the trust is able to claim the PRE. More particularly, the trust must fall within one of three categories of trusts. The trust must be:

  1. a qualifying life interest trust (being an alter ego trust, joint partner trust, or qualified spousal or common‑law partner trust),
  2. a qualified disability trust, or
  3. trusts for minor children of a deceased parent (sometimes referred to as “orphan trusts”).

In addition to falling into one of these three categories, there are other requirements relating to such trusts. For example, with respect to orphan trusts, the “specified beneficiary” must be an individual who is under 18, resident in Canada, and whose mother or father is a settlor of the trust and either (a) neither parent is alive at the beginning of the year or (b) the trust arose before the beginning of the year as a result of the death of either the mother or father. While Income Tax Folio S1-F3-C2, Principal Residence specifies “mother or father”, I imagine this really means a parent, for example in the circumstances of having two mothers.

If a trust is not able to claim the PRE after 2016, and if the trustees wish to designate a property as a principal residence to claim the PRE for years prior to the 2017 taxation year, they may want to consider obtaining an appraisal to indicate what the fair market value of such property was on January 1, 2017 as gains accrued  until such time, while the property was owned by the trust, should be protected by the PRE. However,  gains that accrued from 2017 until the date of sale will be taxable.

Planning opportunity for years after 2016

The question arises – can you protect the gain after 2016?

If a property is rolled out of the trust under s.107(2) of the ITA to a specified beneficiary, such beneficiary is deemed to have owned the property since the year that the trust acquired it (s. 40(7) of the ITA). A requirement in s. 40(7) is that s. 107(4) of the ITA does not apply. For example, in the circumstance of an alter ego trust, if the property is rolled out to a taxpayer who is not the “alter ego”, s. 107(4) will apply and s. 40(7) cannot not apply, meaning that such taxpayer beneficiary will not be deemed to have owned the property for the years it was held by the trust and thus cannot claim the PRE for those years in respect of such property.

As a result, assuming that the other requirements are met, the specified beneficiary may claim the PRE in respect of such property (if they have not designated another property as a principal residence for those years). Thus, if the trustees roll out the property to a beneficiary of the trust before it is sold or deemed to be disposed of pursuant to the 21-year rule, such beneficiary can include in the formula for determining the portion of the capital gain that is exempt the years that the property was owned by the trust (again, assuming no specified beneficiary designated the years on another property owned by him or her or they). However, while the gain might be exempt,  the beneficiary who acquires the property from the trust  will be entitled to the proceeds of sale (whereas before 2017,  a trust could claim the PRE and the  sale proceeds could have remained in the trust). This may raise other non-tax issues for the family.

(2) Acquiring New Property

Clients can consider purchasing property in a trust that is not currently able to designate a principal residence, with the intention of distributing the property to a beneficiary prior to it being sold. . This strategy may be considered with respect to cottages or properties parents are purchasing for their children, perhaps in a university town. However, as noted above, in order to shelter any future gain, the property must be distributed to a beneficiary prior to being sold. The land transfer tax implications of implementing this strategy need also be considered.



[1] Note – there will be other points of discussion to be had with the client. This blog is intended to touch on only those issues connected with the use of trusts and the PRE

About Tamar Silverbrook
Tamar Silverbrook is an associate in the Trusts, Wills, Estates and Charities group at Fasken. Tamar’s practice is focused on domestic and international trusts, as well as wills and estate planning. Tamar works closely with clients and/or clients’ advisors to draft the appropriate documents to facilitate estate and business succession plans that fulfill clients’ unique objectives. This includes providing advice on probate planning, disability planning, charitable gifting, asset protection strategies, cross-border estates and tax issues, personal privacy, family law matters and the interpretation of trusts’ provisions and the corresponding scope of authority provided to trustees. Tamar also advises trustees in administrating a range of complex trust matters.


  1. David Tremblett

    May 25, 2021 - 2:08 pm

    Agreed, great article ! It really highlights the complexities of holding a principle residence in a trust.

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