Most estates and trusts are not allowed to claim the principal residence exemption (“PRE”). As the Canada Revenue Agency notes in explaining how the PRE functions, “When you sell your home or when you are considered to have sold it, usually you do not have to pay tax on any gain from the sale because of the principal residence exemption. This is the case if the property was solely your principal residence for every year you owned it.”
When a house or cottage owned by a trust is to be sold, a common planning strategy has been to transfer the property at cost to a beneficiary (or beneficiaries) who occupied the property as a principal residence. This allows the beneficiary to sell the property and claim the PRE.
The Canada Revenue Agency has released a technical interpretation [2023-0990101E5] that indicates this planning may be subject to the new flipped property rules. The flipped property rules deny the PRE and tax the gain as regular income unless the beneficiary owns the property for at least one year (assuming the sale is not due to certain life events).
The trust’s ownership period of the property is not relevant. If the flipped property rules apply, the tax payable by the beneficiary could be double the amount the trust would have paid if no pre-sale planning was done. Trustees and beneficiaries are advised to exercise caution if implementing these transactions.
For assistance with your tax planning needs—including planning and compliance for trusts and estates—contact a member of the Adams + Miles team today.
The above content is not complete, does not address all scenarios and is intended for general information purposes only. This blog should not be used or relied on as a substitute for consultation with your Adams + Miles professional advisor.
