The Canada Revenue Agency (CRA) was recently asked whether the cost of capital improvements made to a real property that is held by an inter vivos trust is included in the adjusted cost base (ACB) of the property and in the ACB of the capital interest of the beneficiaries that have borne the cost of the improvements.

A taxpayer created an inter vivos trust (the Trust) to which the taxpayer and his wife transferred a cottage. The cottage never generated any income and has been subject to major improvements throughout the existence of the Trust. The cost of the improvements has been borne by the capital beneficiaries of the Trust, which are the taxpayer, his wife, his daughter and his grandchildren. The disbursements related to the cost of the improvements do not constitute loans to the Trust and are not refundable by the Trust to the beneficiaries.

Where the cost of improvements made to a real property held by an inter vivos trust is directly or indirectly borne by a beneficiary of the trust, it is the CRA’s view that the payment of the cost of the improvements or the assumption of the related debt, as the case may be, is generally made on behalf of the trust and constitutes a contribution to the trust. As well, the cost of the cottage (for all purposes including a disposition) should include the cost of the improvements made to the cottage that are capital expenditures.

Keep track of those capital improvement costs and reduce tax on the sale of properties help by a trust.