All About Estates

The New Principal Residence Rules and the QDT

I have previously blogged about the “qualified disability trust” or “QDT” that was introduced in 2016 as part of a package of reforms to the taxation of testamentary trusts. The QDT, along with the graduated rate estate, is one of two exceptions to the general rule that, as of January 1, 2016, income retained in a testamentary trust is taxed at the highest marginal rate.

On October 3, 2016, the federal government released new rules that restrict the ability of a personal trust to designate a property held in the trust as a principal residence for tax purposes. For tax years after 2016, in order for a personal trust to be eligible to make a principal residence designation the trust must be a spousal or common-law partner trust, joint spousal or common-law partner trust, alter ego trust, a trust for the benefit of a minor child whose parents are deceased, or a QDT. In addition, if the property in question was acquired on or after October 3, 2016, then the trust must expressly provide that certain beneficiaries have a right to use and enjoy the property as a residence. In the case of a QDT, it is the “electing beneficiary” who must have this express right. The electing beneficiary is the beneficiary who qualifies for the disability tax credit and jointly elects with the trustees for the trust to be a QDT.

The new principal residence rules add another wrinkle to the problem that there can be only one QDT for an electing beneficiary. Consider a typical scenario where spouses prepare mirror wills that leave the residues of their estates to each other in the first instance, and to their issue when the second spouse dies. Now let’s assume that the parents have a disabled child. They would like the share of the residue set aside for the child to be held in a QDT for the child’s lifetime, and they also wish to set aside the family home for the child to live in after both parents have died. Typically the home will be held in joint tenancy such that it will pass to the surviving spouse when the first spouse dies, and when the second spouse dies it will form part of that spouse’s estate. If the family home is allocated to the QDT and it provides the electing beneficiary with a right to use and occupy the property, the QDT will be eligible to designate the property as a principal residence if it disposes of the property. So far, so good.

Problems arise, however, if the spouses die in a common accident and it cannot be determined who died first. Subsection 55(2) of the Ontario Succession Law Reform Act, R.S.O. 1990, c. S.26, deals with the simultaneous death of joint tenants, as follows:

Unless a contrary intention appears, where two or more persons hold legal or equitable title to property as joint tenants, or with respect to a joint account, with each other, and all of them die at the same time or in circumstances rendering it uncertain which of them survived the other or others, each person shall be deemed, for the purposes of subsection (1), to have held as tenant in common with the other or with each of the others in that property.

Subsection 55(1) provides that where two or more persons die at the same time and it cannot be determined who died first, they are deemed to have predeceased each other. The combined effect of these provisions is that if the parents die in a common accident and it cannot be determined who died first, the joint tenancy is severed and a one-half interest in the family home would fall into the estate of each spouse. On the facts described above, a trust for the disabled child would be established under each will, and each trust would hold a one-half interest in the home. However, since there can be only one QDT for the disabled child, if the home is subsequently sold, only one of the trusts will be eligible to designate its interest in the family home as a principal residence, and accordingly 50% of any capital gain realized on the sale will not be sheltered.

In these circumstances, it will be important to incorporate a contrary intention in the wills to draft around subsection 55(2) of the SLRA. However, a broader and more useful solution would be the elimination of the rule that there can be only one QDT for a particular electing beneficiary.

About 
Darren Lund is a member of the Trust, Wills, Estates and Charities at Fasken, 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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