A recent letter from officials of Tax Legislation Division provides hope for trusts established for an individual eligible for the Disability Tax Credit (DTC) to qualify for the principal residence exemption. Specifically, the letter addressed concerns raised by an adviser in respect of her client regarding the benefit of the client’s DTC-eligible son, who was otherwise ineligible for the principal residence exemption.
On October 3, 2016, income tax measures were announced, and subsequently introduced into law, to ensure that the principal residence exemption is available only in appropriate cases. As part of these rules, the definition “principal residence” was amended to add additional eligibility requirements for trusts claiming the principal residence exemption for a taxation year that begins after 2016, including limiting eligibility for the principal residence exemption to three categories of trusts.
In order to accommodate trusts that hold property for the benefit of a Canadian resident who is disabled, the measure preserved the ability of a qualified disability trust to be eligible to claim the principal residence exemption. A qualified disability trust must be a testamentary trust (generally a trust that arose on and as a consequence of the death of an individual, subject to certain exception) where, among other criteria, a beneficiary of the trust is DTC-eligible.
The adviser noted that following the introduction of these new measures, the Trust would no longer qualify for the principal residence exemption since the trust was established during the lifetime of the settlor, rather than as a testamentary trust.
In their response, the Tax Legislation Division agreed that it would be appropriate to make certain inter vivos trusts eligible to claim the principal residence exemption and would be prepared to recommend to the Minister of Finance that the Income Tax Act be amended in a manner that allows an inter vivos trust for the benefit of an individual who is DTC-eligible to be eligible to claim the principal residence exemption for tax years taxation years that begin after 2016 as long as certain conditions are met:
- 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; and
- no person other than a beneficiary described above may, during the beneficiary’s lifetime, receive or otherwise obtain the use of any of the income or capital of the trust.
This is great news for estate planners in those situations where there is a disabled beneficiary. Thanks for the reading and the best of the season to you and yours.