On an average $150,000 home a principal residence exemption can save $1,125 per year, every year. As part of an estate plan, she is considering the use of an alter ego trust, a type of living trust available to seniors age 65 or older. For the QDT, the beneficiary must elect to benefit from the QDT, and he or she must be the spouse or common-law partner (or former spouse or common-law partner), or a child of the settlor. Further, the beneficiary must qualify for the Disability Tax Credit. Under the current rules, the trust itself, but not the relevant occupants of the home, must be resident in Canada in order to claim the principal residence exemption. The trust is a Special Need Trust. Provided that a “specified beneficiary” – defined as one who is beneficially interested in the trust and occupies the home as a principal residence – designates no other property as such, the trust would be permitted to claim the property as a PRE thereby sheltering it from tax for the years designated. Read: Pitfalls with the Principal Residence Exemption. If a home which is a principal residence is held by a trust for probate planning purposes, distributing that home to a beneficiary now, who can designate it as a principal residence, will avoid the possibility that the exemption could be lost after 2016 if the beneficiary dies while the trust still owns the home. Lebane points out that many trusts for children are intended to continue after they turn 18, including principal residence trusts. If the property is the type of property that can otherwise qualify as a principal residence, the deemed trust may be able to use the rules referred to in ¶2.65 to 2.68 to claim the principal residence exemption to reduce or eliminate any gain that would otherwise occur (for tax purposes) as a result of a disposition of the property. Lebane points out a few concerns for life interest spousal trusts. Why Advisor’s Edge will be reborn in 2018, Proposal deletes MFDA rules for limited trading authorization, Debt, slower growth in net worth weigh on Canadians pre-pandemic. During the webinar, Lebane detailed what advisors need to know. One might assume the child can move in with the living parent, but Lebane points out that parent could be estranged or unable to house the child. People can benefit from only one QDT at a time, which can restrict planning. Market conditions may change which may impact the information contained in this document. Kelsie, on her terminal return? Under the new rules, only three types of trusts are eligible to claim the PRE: Read: Principal Residence Exemption: What’s changed, what hasn’t. Lebane points out a few concerns for life interest spousal trusts. b. Alter ego, joint partner or other self-benefit trusts, A qualified disability trust (for a spouse or child of the settlor provided the spouse or child is eligible for the federal disability tax credit). Share this article and your comments with peers on social media. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Trustees eligible for the principal place of residence exemption also include trustees: Of a fixed trust or bare trust for a person who uses and occupies the land as their principal place of residence. If yes, who will be taxed? As a part of the changes, the types of trusts eligible to claim the PRE were reduced. How two advisors are riding out the Covid-19 storm - and gaining clients. Ownership by a trust: Starting as of 2017, additional requirements will be applicable where a trust owns a principal residence (for … If you have clients whose wills create principal residence trusts, make sure the language within the will complies with the October 2016 rule changes. If the testator dies, he says post-mortem planning is limited, but can include going to court for a wills variation. If one of the residences is the family’s principal residence, that property is exempt and the others are liable. They are not intended to predict or project investment results. Why is the Principal Residence Exemption So Important? Read: Pitfalls with the Principal Residence Exemption. It’s only possible to claim the PRE “if the right to occupy is unconditional for the spouse’s lifetime,” he says. Many Canadians consider the use of a living trust when creating their estate plans. Certain statements contained in this communication are based in whole or in part on information provided by third parties and CI has taken reasonable steps to ensure their accuracy. The home is the principle residence of the beneficiary since 1964. The PRE can be quite valuable because it exempts the principal residence from up to 18 mills of taxes levied by a local school district for operating purposes. Lebane suspects that many documents will be offside. Having only three trust types is restrictive, but the rules are even more specific. Also, it is possible for real estate held by an estate to qualify as a principal residence. Read: Worried about principal residence exemption changes? If Kelsie’s home is transferred to the trust, given that the trust will then own the home, will the PRE continue to be available to shelter the home from tax? Lebane suggests that those involved with ineligible trusts obtain a valuation for the property as of the end of 2016. This article will look at the most commonly asked questions about the principal residence exemption. More commonly known as inter vivos trusts in tax and legal circles, because assets transferred to the trust would normally bypass the estate of a deceased settlor, the trusts can be effective in reducing estate administration (i.e., probate in common law jurisdictions) fees, avoiding complex estate settlements and ensuring confidentiality upon death of its settlor. Now, the PRE allows Canadian resident taxpayers and personal trusts to reduce or eliminate a realized capital gain and the associated tax on the sale of a principal residence. How new Principal Residence Exemption rules affect trusts, The new rules around trusts will cause “the most consternation for planners”. When a principal residence is sold, the gain is not taxable if it has been the person's principal residence for the whole time it has been owned. He adds that an asset as valuable as a family house can be a big responsibility for an adult child to own outright. Generally the exclusion is available only to an individual, because an entity, such as a trust, cannot use a house as a principal residence. Can she claim their U.S. property as a principal residence to get the tax exemption? A Principal Residence Exemption (PRE) exempts a residence from the tax levied by a local school district for school operating purposes up to 18 mills. For the minor child trust, the beneficiary must be the child of the settlor, and both parents (including the settlor) must be dead before the start of the year. As you can see from the formula, to get the tax reduction you must designate the home as principal residence on a year-by-year basis. Or the trust. According to the Canada Revenue Agency any residential property owned and occupied by you or family at any time in a given year could be designated as a principal residence. For the minor child trust, the beneficiary must be the child of the settlor, and both parents (including the settlor) must be dead before the start of the year. This exclusion is not available to trusts. A trust for minor children of a deceased parent, subject to conditions. “These things would put a trust offside because that’s a quid pro quo,” says Lebane. Just in time for its 20th birthday, Advisor’s Edge is being reborn. Ownership by a Trust: Starting as of 2017, additional requirements will be applicable where a trust owns a principal residence (for … Further, while this tactic may work for tax reasons, often “it’s not what the testator planned at all. A trust created for a minor child of the settlor, if the trust acquires property after October 2, 2016, “the terms of the trust must provide the beneficiary with a right to the use and enjoyment of the housing unit as a residence throughout the period in the year in which the trust owns the property.”, For tax year 2016, CRA has said it would assess PRE filing penalties in only “the most excessive cases.” Says Lebane, “I don’t know what excessive means, but I think there’s just more leniency.”, The new PRE rules eliminate the one-plus rule for non-residents (. But for “any wills where the testator is still alive, they need to have that language.”. Missing this one form could therefore cost $33,750 over a 30 year ownership period. Last resort? As Budget 2017 reminded us, new Principal Residence Exemption (PRE) rules have been in effect since October 3, 2016. The trust can claim the PRE until the end of 2016, and any subsequent increases will be taxable. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. She also understands that from that point forward, the trust would own the assets, subject to attribution rules that would see future income and capital gains from the assets taxed in her hands until her death and to the trust at the top marginal tax rate thereafter. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Since the trust would be deemed to own the home for the entire period it was owned by either the settlor or the trust, the trust would be in a position to claim the exemption, even for years prior to the rollover to the trust. If the trust still owns the home at the time of Kelsie’s death, will the property be taxable at that time? And Lebane reminds us that beneficiaries of QDTs must qualify for the Disability Tax Credit (DTC). “The [options for] trusts for minor children are quite narrow,” he says. If the home does not fully qualify for the PRE at the time of a subsequent sale, who would be taxed on any resulting gain? Since a Trust is not a natural person, they are generally not allowed to … Entitlement to occupy under the terms of the trust is satisfied where either a beneficiary has an interest in possession in the pr… Technically, there is a tax, but the government also offers a limited exclusion under Section 121 of the Internal Revenue Code. The exclusion is generally $250,000 but can be increased to $500,000 if the sellers are married and file a joint tax return for the year of the sale, and both have met the use test for the house. Another great thing about Michigan is how our property tax increases are limited through prop A. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. In considering the transfer of her home to the trust, Kelsie has the following questions: Subject to conditions, tax legislation has, for many years, permitted personal trusts to claim the principal residence exemption in respect of qualifying property owned by the trust. Or the trust at the top marginal rate? Paragraph 35 of Interpretation Bulletin IT-120R6 contains more details about the principal residence exemption available to a personal trust. Can a family trust claim a CGT exemption for the principal place of residence? Ownership by a trust . But if they’re living in the house and they are over 18, the trust becomes ineligible.”. All charts and illustrations in this document are for illustrative purposes only. Or the trust? They’re not leaving home at 18 […] or [even] 25, I dare say. Michigan residents who own and occupy real estate as their principal residences can qualify for the Principal Residence Exemption (PRE), formerly known as the Homestead Exemption. Another wrinkle: the minor child trust is ineligible if one parent is alive, “regardless of the relationship with the child,” says Lebane. As you can see from the formula below, to get the tax reduction you must designate the home as principal residence on a year-by-year basis. On October 3, 2016, the Department of Finance Canada announced a number of changes to the PRE rules designed to improve compliance and administration of the tax system. For a property of a personal trust to qualify as a "principal residence" in a taxation year beginning after 2016, among other requirements, the personal trust must be an eligible trust and one of its beneficiaries (who is a … Kelsie, at graduated tax rates? By accepting this notice and continuing to browse our website you confirm you accept our Terms of Use & Privacy Policy. However, the trustees themselves are unlikely to occupy the property and it is thus necessary for one or more beneficiaries to occupy it. If the trust still owns the home at the time of Kelsie’s death, will the property be taxable at that time? That’s because official inflation numbers... From government benefits to 401(k)s, our experts covered the big topics, The industry has standardized its LTA practices, Fewer people report being debt-free in their retirement years, StatsCan says, The result offers a glimmer of hope for 2021. Kelsie, on her terminal return (the final return submitted following her death)? Effective January 1, 2017, the types of trusts eligible to claim the PRE are as follows: Also, in each case, the beneficiary must be a resident of Canada. The Principal Residence Exemption The Principal Residence Exemption The principal residence exemption rules under the Income Tax Act allow you to eliminate or reduce the capital gain from the disposition of your principal residence. And now you have large funds in the hands of the beneficiary, which is often contrary to the point of the trust.”. Yet it’s common for trusts to place conditions on the spouse’s living in the house, such as only being able to live there if they do not remarry, or specifying that the spouse must pay for utilities and upkeep. If the intended beneficiary hasn’t qualified for the DTC yet, he recommends initiating the process now. As you can see from the above formula, to get the tax reduction, you must designate the home as principal residence on a year-by-year basis. In years prior to 2016, there was no need to report the sale on your tax return if the entire gain was eliminated. That way, there will be “a certain value that will be sheltered” by the PRE. However, thereafter this benefit may no longer be available. So, if you own and live in a detached or Individual taxpayers and certain trusts (subject to recent changes) can claim … “We all know what’s going on with older kids in university. Generally, individuals who sell their primary residence are entitled to exclude up to $250,000 (single) or $500,000 (married) of the capital gain if they meet certain requirements. In short, the trust terms must mandate both the unconditional right to occupy and that “the proceeds received by the trust must remain available to the spouse, and only to the spouse, for the remainder of her life,” says Lebane. One of the assets to be transferred to the trust is her home, a property she has occupied as her principal residence for each of the 30 years she has owned it. Guaranteed Retirement Cash Flow Solutions, Morningstar 4- and 5-Star Rated Top Performing Funds, by Tax, Retirement and Estate Planning team, RRSPs and TFSAs – Unused contribution room at death, COVID-19 Economic Response FAQ’s for Businesses, COVID-19 Economic Response FAQ’s for Individuals. However, as of October 3, 2016, changes to the principal residence rules significantly limits the ability for an Estate to claim the Principal Residence Exemption. Further, each type of trust has its own beneficiary requirements. “If the principal residence is held in one [trust] and the investments are in another, you have a choice to make” as to which trust to benefit from, Lebane points out. Section 211.7cc and 211.7dd of the General Property Tax Act, Public Act 206 of 1893, as amended, addresses PRE claims. If yes, who will be taxed? But it’s the new rules around trusts and principal residences that will cause “the most consternation for planners,” said Ian Lebane, a tax and estate specialist with TD Wealth Private Client Services, at a webinar held by the Society of Trust and Estate Planners (STEP) in March. Those rules changed reporting requirements and excluded non-residents from certain provisions. Life interest trusts, or as Lebane explains, “trusts that would benefit from a rollover, generally speaking.” These trusts are: joint spousal or common-law partner trusts; or. For life interest trusts, the beneficiary can only be the settlor, or the spouse or common-law partner or former spouse or common-law partner of the settlor. If there’s no way to make an ineligible trust eligible for the PRE, Lebane says the Income Tax Act permits the trust to roll out the property to a capital beneficiary who will “be deemed to have owned the principal residence for the years the trust owned it.” He cautions, however, that this is not possible for all beneficiaries. From what I understand the answer is no, as the trust is not a natural person. With alter ego trusts, Kelsie understands that she can transfer assets to the trust on a tax-deferred basis. The good news is that trusts that are currently able to claim the principal residence exemption will continue to be able to do so on gain accrued up to and including the end of 2016. Thus, a trust where the beneficiaries are non-residents of Canada may potentially qualify for the principal residence exemption provided the trust is resident in Canada. at a webinar held by the Society of Trust and Estate Planners (STEP) in March, Principal Residence Exemption: What’s changed, what hasn’t, Pitfalls with the Principal Residence Exemption, Worried about principal residence exemption changes?

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