Question: what happens if the estate is divided equally amongst 3 beneficiaries and one does not own a principal residence, can he claim his portion of the capital gains income under the principal redemption? or does it have to be claimed as a capital gain?
On the date of death the deceased claims the principal residence exemption. If the terms of the will leave the residence to the beneficiaries, then the beneficiaries who do not own a principal residence may claim the exclusion for their share if they “ordinarily inhabit” the property. In other words, the beneficiary or someone related to that beneficiaries immediate family should move into the residence in order to claim the exclusion. Anyone with a principal residence would be subject to capital gains or losses. Now if all of the beneficiaries agree and none may claim the principal residence exclusion, the estate may sell the property and the gains would be taxed in the estate rather than in the beneficiaries hands and a form of income splitting may be achieved.
Follow-Up Question: more questions… the property was sold while it was still in the estate – two of the beneficiaries will have no or very little income and it will affect only one of the beneficiary – under these circumstances, is there any benefits of having the capital gains claimed in the estate? Does the estate have any additional exemptions or “perks” that an individual may not on their personal return.
Also, are there any benefits of requesting a clearance certificate when beneficiaries and trustees are one and the same?
If the property was sold in the estate then the benefit of transfer is lost. The estate has no other benefit other than to split income but given the circumstances there is no benefit in your situation.
The clearance certificate must be obtained before any assets are distributed to the beneficiaries. If the executor does not obtain the certificate then the CRA can hold the executor liable for any taxes that are still due.