The federal government recently issued new rules for the Principal Residence Exemption (PRE), which allows for exemption from tax on capital gains if you are selling your primary residence.
The rule changes are meant to ensure that only Canadian residents benefit from the exemption. However, the new rules will also affect PRE eligibility for trusts.
Until recently, a personal trust could claim the PRE if the beneficiary "ordinarily inhabited" the home. Now the rules specify that only these types of trusts are eligible:
- Alter ego
- Joint spousal/partner
- Spousal or common-law partner
- Qualified disability trusts (QDTs)
- Trusts for minor children of a deceased parent
Additionally, for the trust to be eligible for the PRE, the beneficiary who occupies the home must be a resident of Canada. And for QDTs, the home must be the beneficiary's primary residence, and the beneficiary must be either the spouse, partner, former spouse or partner, or child of the settlor of the trust.
The rule changes will also affect trusts for adult children with disabilities. Specifically, trusts, including Henson trusts, for children who do not qualify for the Disability Tax Credit will not be eligible for the PRE.
While the rule changes are designed to prevent non-residents from accessing the exemption, Canadians who have created trusts should revisit their estate plans to ensure that the proper strategy is being implemented.
For more on these matters, please see Hagel Lawfirm's overview of setting up a trust.