Tax for Estate Planners: Resulting Trusts

An elderly client comes to you. You find out she lives alone in a residence registered in someone else’s name. After further investigation, you discover that the client has placed her child or children on title (either jointly or entirely).

This is typically done to avoid probate fees (in BC, 1.4% of the value of the estate) when the client passes away. However, the key question here, and far more important, is whether the client’s actions have compromised her ability to use the principal residence exemption (the “PRE”) on the property.

In this note, I examine the tax implications and potential planning opportunities that arise in these cases.

Resulting trust

In this case, it’s likely that only legal title, and not beneficial ownership, has been transferred to the child. Legal ownership (registered title) may be different from beneficial ownership (actual ownership). In cases where there’s no documentation specifying who holds beneficial ownership, the client may retain it.

This is because the law of “resulting trust” applies. The SCC’s decision in Pecore v. Pecore, 2007 SCC 17 confirms that a transfer from a parent to an adult child generally creates a resulting trust. Under this framework, the child holds the property as an agent and bare trustee for the parent. This means the parent retains beneficial ownership and can continue to use the PRE.

The CRA has acknowledged this legal principle but has also incorrectly stated that there is a presumption that the legal owner is the beneficial owner unless the facts say otherwise. This is not correct at law.

If there’s no evidence indicating an intent to gift the property to the child, a resulting trust applies. In that case, the client retains beneficial ownership, enabling them—or their estate—to claim the PRE when the property is sold or upon their passing.

However, unless further planning is done, this does mean that the estate will still need to pay probate fees in respect of the residence.

What to do?

At this point, you could recommend drafting bare trust documentation to formalize the arrangement (making clear in the recitals that this is putting in writing a resulting trust). Just because, at law, a resulting trust applies does not mean that the CRA won’t hassle your client if she doesn’t have documentation showing it.

Additionally, you might consider whether the client could potentially avoid probate fees and obtain the principal residence exemption (dual wills, children hold only rights of survivorship, alter ego trust, etc.).

If you have any further questions about the resulting trusts (or tax questions related to estate planning), you can feel free to reach out to us. The author can be contacted directly at jonathan@rkwlaw.ca or 604.425.1123.