Principal Residence Exemption – Trust Designations

As we noted a few posts ago, Principal Residence Disposal reporting rules are changing, see our post here if you missed it. Staying on the theme of principal residence exemptions, there is another change being enacted which could have very large consequences for some people.

Typically when a personal trust acquires a principal residence, it will be exempt from tax on the capital gains, which is similar to how it works for individuals. A residence is able to be designated if a specified beneficiary, the beneficiary’s spouse / common-law partner, former spouse / common-law partner, or child, lives in the residence. In each of these cases, the individual would need to have a interest in the trust.

Essentially what this means is that, under the old rules, if you were living in your parents house after they died, the capital gain that accrued after their date of death (which is attributable to the estate of the parent) was tax free when the residence was sold, assuming the child didn’t have a different principal residence already.

However, under the new changes beginning January 1st, 2017, only certain circumstances will be eligible for this designation. The only trusts eligible for the exemption are alter ego, spousal/common-law, joint spousal/partner, qualified disability trusts, and trusts for minor children of a deceased parent. In other words, adult children will NOT be eligible. So if you have been living in your parents residence after they passed away (and do not fall under any of the aforementioned criteria), and it is your principal residence, you could be in for a hefty tax bill once sold.

To avoid such an occurrence, it is wise to sell the house from the estate to the child as quickly as possible after death. The estate will be tax free up until the date of death, and the child will get a bump up in cost base, after which any gains will be tax free. While this might seem like a narrow scenario, consider the housing market in Vancouver. If you had taken over your parents house in the last couple years, the property easily could have gained 30% in as a little as a year. And while it’s great that you get to pocket those extra proceeds, the unexpected tax bill (at the top marginal rate) on a multiple hundred thousand dollar gain could be a tough pill to swallow.

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