Principal residence trusts in 2019
Some taxpayers use principal residence trusts to hold their principal residences for asset protection purposes. One of the main objectives of this type of trust is to preserve the capital gains exemption upon a sale of the principal residence.
In October of 2016, the Minister of Finance of Canada issued new tax measures relating to the detention of a principal residence in certain types of trusts and their admissibility for the capital gains exemption upon the disposition of the principal residence. For the taxation years beginning after 2016, only certain types of trusts would continue to be admissible for the principal residence exemption. As a result, upon the disposition of a principal residence by a non-qualifying trust, only the capital gain accumulated at end of 2016 will be sheltered, necessitating an evaluation of the principal residence on December 31st, 2016. Any subsequent increase in value would be subject to capital gains tax.
It is possible, should certain conditions be met, to transfer the residence to the original transferor immediately prior to the sale on a rollover basis in order to access the principal residence exemption for the entire period of ownership of the residence. This would allow the existing trust to remain in place for the time being. However, if the trust initially acquired the residence from a person other than the beneficiary, for example it purchased the residence from an unrelated vendor, there may be land transfer taxes on the rollout of the residence from the trust.
Principal residence trusts remain a useful tool to protect a principal residence from potential creditors, however they must be properly drafted and the acquisition must be properly structured in order for the taxpayer to continue to benefit from the capital gains exemption and to avoid unwanted consequences.
Please note that the above does not constitute a legal opinion and is for information purposes only.