All About Estates

TRANSFER OF PROPERTY FROM PERSONAL TRUST TO BENEFICIARY

Recently, the Canada Revenue Agency (“CRA”) was asked to comment on a scenario involving a transfer of real estate from a Personal Trust to a beneficiary where the beneficiary also assumed a mortgage on a property.

In past interpretations, the CRA noted that the transfer of assets from the Trust at cost may be restricted where a portion of the property is received in settlement of a debt due from the Trust to the beneficiary. In other words, in the CRA’s view, a rollover at cost applies only to property transferred in full or partial settlement of the beneficiary’s interest in the capital of the Trust.

Assume The Trust owned a rental property with a value of $500,000. The Trust owed the beneficiary $200,000, secured by a mortgage on the property. Based on the CRA’s prior interpretations, if the Trust transferred the property to the beneficiary in settlement of the debt and as well his capital interest, 40% of the property ($200,000 of the $500,000 associated with debt) would be transferred in settlement of the debt and deemed disposed of by the Trust and acquired by the beneficiary for fair market value. The remaining $300,000 or 60% would be transferred in settlement of the beneficiary’s capital interest and would be transferred at cost provided all other relevant tests are met.

What if the Trust borrowed $200,000 from a unrelated party, secured in the same fashion as the beneficiary’s debt and use those funds to repay the balance due to the beneficiary. The trust would then distribute the real estate to the beneficiary who would also assume the $200,000 debt to the unrelated parry. Presented with this scenario the CRA confirmed that the real property would be deemed disposed of by the Trust and acquired by the beneficiary at its tax cost to the Trust. Essentially, this approach would avoid the requirement for the Trust to realize any portion of any gains associated with the real estate property.

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About Steven Frye
Baker Tilly WM LLP is a leading, independent audit, tax, and business advisory firm based in Vancouver and Toronto, serving clients across Canada. Drawing on well-trained teams across a variety of disciplines, we ensure the alignment of our professional’s skills and experience with client requirements, resulting in exceptional service and business outcomes.