Principal Residence Trusts in Ontario

Who Inherits the Family Home?

For many people, the family home is their most valuable asset and a key part of their long-term planning. Deciding how it should pass to the next generation is often one of the most important parts of an estate plan.

One option is a Principal Residence Trust. This specialized estate planning tool can help transfer ownership of a home and if structured correctly may reduce or avoid probate while preserving the principal residence exemption. It can also be used to allow a loved one to remain living in the home until they pass, or for a period of time that you designate, before the property passes to a chosen beneficiary.

How a Principal Residence Trust Works in Ontario

A Principal Residence Trust in Ontario is a legal arrangement where ownership of a home is transferred from an individual to a trust. The trust’s terms set out who can live in the home and who will receive it after those rights end. For example, you might create a trust that lets your spouse live in the home for life, with the property passing to your children afterward.

Once the home is in the trust, the trust becomes the legal owner. This means the property does not form part of your estate when you pass away. Using a trust can help reduce or potentially avoid probate fees (also called Estate Administration Tax in Ontario) and ensure the property passes to your chosen beneficiary.

These benefits are significant, but the trust must be set up carefully. Otherwise, you could trigger capital gains tax or lose eligibility for the principal residence exemption.

Tax Implications of a Principal Residence Trust

From an income tax perspective, an important consideration is whether the trust can claim the principal residence exemption. This exemption protects capital gains, which are the profits realized when an asset is sold for more than its original purchase price.

Without the exemption, a tax bill can arise when the property is sold or on a deemed disposition (when the trust ends or when the property is transferred in or out). The Canada Revenue Agency (CRA) treats this as if the property was sold at its current value, triggering capital gains tax on any increase in the property’s value since it was purchased.

The CRA allows certain trusts to designate a property as a principal residence, but the rules are narrow. To qualify, the trust must be set up for a specific beneficiary, such as an alter ego trust, joint partner trust, spousal trust, or qualified disability trust. The beneficiary must live in the home and be the only person the trust is intended for.

If a trust does not meet these requirements, transferring the home into the trust may trigger immediate capital gains tax. Future growth in the property’s value would also be taxable. This is why legal and tax advice is essential before creating a Principal Residence Trust. For more information on how the CRA applies the principal residence exemption to trusts, see the CRA guidance on principal residences.

Common Reasons to Use a Principal Residence Trust in Ontario

Principal Residence Trusts are often used in blended family situations. For example, if you want your spouse to have the right to live in your home for life but ultimately want the property to pass to your children from a previous relationship, a trust can ensure your wishes are carried out. Without this arrangement, leaving the home to your spouse means they could sell it or leave it to someone else in their Will. Learn more tips about estate planning for blended families in my blog on the topic.

A trust can also help if the intended beneficiary is a minor or someone who cannot manage property. A trust would hold the home for them and ensure it is maintained until they are ready to take ownership.

In some cases, a Principal Residence Trust can also protect the property from creditors of the ultimate beneficiary. However, this is complex and depends on the trust’s structure and timing, so legal advice is essential.

Legal and Practical Considerations for Ontario Principal Residence Trusts

Creating a Principal Residence Trust involves more than transferring the title of your home. The trust agreement must be properly drafted to comply with Ontario trust law and Canada’s tax rules. You’ll also need to assess whether land transfer tax applies at the time of transfer. Some transfers are exempt, but others may attract the tax.

Once established, the trust becomes a separate taxpayer and must file its own annual tax returns. The trustees are responsible for managing the property under the trust’s terms, which includes maintaining the home, paying expenses, and keeping insurance in place. If the home is eventually sold, the trustees must determine whether the principal residence exemption is available to reduce or eliminate capital gains tax.

Practical flexibility is another key consideration. Once the home is in the trust, it cannot be sold, mortgaged, or otherwise dealt with unless the trust agreement permits it. If you continue to live in the property, you need to be comfortable with these restrictions before proceeding. Because the legal and tax rules are complex, professional advice is essential to ensure the trust is properly structured and achieves the intended benefits.

Even with careful planning, a Principal Residence Trust carries risks if not structured or managed properly. The most serious risk is losing access to the principal residence exemption, which can create significant tax liability when the home is sold. Additional risks arise if trust terms are vague or trustees fail to follow them, leading to confusion or costly mistakes.

Family conflict is another concern. For example, if the person living in the home does not properly maintain it, other beneficiaries may feel their interest in the property is being harmed. Clear, well drafted terms and a capable trustee can help prevent these issues.

When properly planned, a Principal Residence Trust can provide peace of mind that your home will pass according to your wishes while minimizing complications for your family. Because the legal and tax rules are interconnected, professional advice from both an estate lawyer and a tax specialist is essential to ensure the trust is structured correctly and achieves the intended benefits.

This article is intended for informational purposes only. For personalized advice tailored to your specific circumstance, please reach out to the E is for Estates team.

Erin L. Watson, B.A., JD

Lawyer & Notary Public

E is for Estates