Can a Trust Claim the Principal Residence Exemption in Canada?

Families often put a home into a trust for estate planning, to protect a family member, or to hold it for a relative. When the home is later sold, they discover that the principal residence exemption does not work for a trust the way it does for an individual.

This article outlines which trusts can designate a home, what the trustee files, and why occupancy matters. Trust terms vary widely, so a lawyer or accountant should review the actual trust deed.

This article covers Canadian federal tax law, which applies in every province.

Individuals and trusts file differently

Individuals other than personal trusts designate a property and calculate any gain on Form T2091(IND). A personal trust follows a separate path. The trustee files Form T1079 naming each specified beneficiary.

The starting point is the same as for anyone else: the property must meet the definition in section 54 of the Income Tax Act, which requires a housing unit that is owned and ordinarily inhabited in the year by qualifying people.

For individuals, the sale of a principal residence must be reported on Schedule 3 of the T1 return, even if there is no gain or the whole gain is exempt, and CRA allows the exemption only if the disposition and designation are reported. How reporting works for a particular trust depends on its facts, so it is worth confirming the steps with an accountant.

Which trusts can claim

A trust can claim the exemption only if it meets the section 54 conditions, and no corporation (other than a registered charity) or partnership may be beneficially interested in it. After 2016 the trust must also be one of these types:

• an alter ego trust
• a spousal or common-law partner trust
• a joint spousal trust
• a qualified disability trust
• a trust for a qualifying minor or disabled beneficiary

A trust that does not fit one of these categories after 2016 generally cannot claim the exemption on the same basis, although subsection 40(6.1) protects the gain accrued to the end of 2016 on its first disposition of the property after 2016. If you are unsure which category your trust falls into, the trust deed and the date it was created are the first things to review.

Who needs to live in the home

The property must be ordinarily inhabited in the year by the taxpayer or a spouse, common-law partner, former spouse or partner, or child. Whether a unit is ordinarily inhabited is a question of fact. How that test applies to a particular trust depends on its facts and its beneficiaries, so it is worth confirming with a lawyer or accountant. The trustee also files Form T1079 naming each specified beneficiary.

Even a short period of occupation in the year can be enough, but where the main reason for owning is to earn income a brief occupancy generally will not qualify. If no qualifying person lives in the home in a year, for example because it is rented or vacant, a subsection 45(2) or 45(3) election may let the property still be treated as a principal residence for that year, but that election is not available if capital cost allowance was claimed on the property after 1984 and on or before the change in use.

The same logic applies to co-owners. A co-owner who does not live in the home, for example an adult child on title for a parent, cannot designate it unless the unit was ordinarily inhabited in the year by that co-owner or their spouse or partner, former spouse or partner, or child. The requirement applies to each owner's own claim. Simply being on title or named in a document is not enough.

Trusts that lost eligibility after 2016

Some trusts that used to qualify no longer do after 2016. For a trust that no longer qualifies, subsection 40(6.1) protects the gain accrued to the end of 2016 on its first disposition of the property after 2016. Gain that accrued after 2016 is generally not protected in the same way.

If you hold a home in a long-standing trust, ask a lawyer or accountant whether the trust fits an eligible category now and whether this protection applies.

When a home is sold, the capital gain is the proceeds of disposition minus the adjusted cost base and the outlays and expenses of the sale, and half of the capital gain is taxable. Where a home qualifies and is designated as a principal residence, part or all of that gain may be exempt under the formula in paragraph 40(2)(b) of the Income Tax Act. Whether that applies to a trust's sale depends on the trust's type and facts, so it is worth confirming with a lawyer or accountant.

What to do next

Timing of the sale can matter too. For dispositions after 2022, a home owned for less than 365 consecutive days before it is sold can be caught by the flipping rule, which treats the gain as business income, so the principal residence exemption does not apply. Exceptions include a sale that can reasonably be considered to occur due to death, serious illness or disability, or the breakdown of a marriage or common-law partnership where the couple has been separated for at least 90 days.

• Locate the trust deed and any amendments.
• Identify the type of trust and the date it was created.
• List every beneficiary and confirm none is a corporation (other than a registered charity) or a partnership.
• Record who lived in the home each year.
• Confirm that the trustee will file Form T1079 naming each specified beneficiary.
• Get tax advice before selling, because the answer depends on the trust's type and terms.

Frequently asked questions