Preserve assets with a principal residence trust

When I met with Gordon and Victoria about their upcoming second marriage, they wished to discuss what legacies they wanted to leave to the children they each had in previous marriages.

I suggested they each get independent legal advice, but they insisted on being advised together, so I had them sign an acknowledgment and waiver of ILA.

They were both contributing to the purchase of a new home, and wanted to ensure that on death the one-half contribution of each went to the children of the first marriage of each.

I recommended that they establish a Principal Residence Trust (“Residence Trust”) to hold the new home. As Gordon and Victoria were to settle the Residence Trust on themselves as trustees, for the benefit of themselves and the respective heirs of their estates, a simple change in legal title would be registered.

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I explained that the Residence Trust would preserve the availability of the Principal Residence Exemption from future capital gains that may be realized on the disposition of the home. On the death of either of them, the Residence Trust would continue to own the home, so no probate tax would be payable on the value of the home. On the purchase of this $2 million home, the probate tax in Ontario would otherwise be about $30,000.

On the death of the first spouse, the surviving spouse would have the power to deal with the assets of the Residence Trust in his/her discretion, but preserving those assets for the beneficiaries of the Residence Trust. After the death of both Gordon and Victoria, the trustees would be empowered to deal with the matrimonial home in accordance with Gordon and Victoria’s respective wills.

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I pointed out that the Income Tax Act’s definition of a Principal Residence allows for a trust to own the home and, on disposition, designate specific family members who have been beneficiaries of the Residence Trust and have ordinarily inhabited the home. In the case where this home is the only one claimed by the designated individual as his/her principal residence for each particular year of ownership, the trust may claim the Principal Residence Exemption.

Because each family can have only one Principal Residence at a time for its adult members who ordinarily inhabit the home, any adult beneficiary of the Residence Trust who has another home at that time which is that person’s Principal Residence will be excluded as a beneficiary from this trust.

Gordon and Victoria left my office satisfied that they had a tax-effective solution to a problem that had been vexing them.

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Lorne Saltman is a tax partner with the Toronto-based law firm Gardiner Roberts LLP.