Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether an agreement of purchase and sale results in a change in beneficial ownership of real property at the time the agreement is entered into.
Position: Question of fact.
Reasons: Where an agreement contains a "condition precedent" that remains outstanding, there can be no change in beneficial ownership of a property until such condition precedent is satisfied.
A. Seidel
XXXXXXXXXX (613) 957-2058
2004-006629
April 29, 2004
Dear XXXXXXXXXX:
Re: Transfer of Deed and Beneficial Ownership
We are writing in response to your March 10, 2004 e-mail, wherein you requested our comments regarding beneficial ownership of property.
You described a situation where a corporation owned land and a building (the "Property") for a number of years. The corporation entered into an "agreement of purchase and sale" (the "Agreement") with an individual (the "Purchaser") who does not deal at arm's length with the only shareholder of the corporation. The corporation never transferred title to the property to the Purchaser. You inquired whether there has been a change in beneficial ownership of the Property on the date the Agreement was entered into, notwithstanding that, to date, there has been no change in legal ownership of the Property.
The particular circumstances in your letter on which you have asked for our views relate to a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. To the extent that you require confirmation of the tax consequences of proposed transactions, you should be requesting an advance income tax ruling. However, we would point out that advance income tax rulings are not provided in respect of transactions that are substantially completed. Completed transactions are reviewed by the local tax services office. Although we cannot provide any specific comments with respect to the situation described in your letter, the following general comments may be of assistance.
The determination of whether or not there has been a change in the beneficial ownership of a property, without a corresponding change in the legal ownership of the property, is a question of fact that can only be determined after a review of all of the circumstances applicable to a particular situation. Paragraph 8 of Interpretation Bulletin IT-170R, Sale of Property - When Included in Income Computation ("IT-170R") discusses the primary attributes of beneficial ownership of a property, being possession, use and risk. Paragraph 8 also lists the factors that are considered to be relevant to the determination of whether there has been a change in beneficial ownership.
Paragraphs 9 and 10 of IT-170R discuss the sale of real property. Although a purchaser acquires an equitable interest in a property upon execution of a binding agreement for sale or an accepted offer to purchase, there will be no effect for income tax purposes unless and until the vendor becomes entitled to the sale price. Many agreements involving the sale of real property propose a "closing date" for the completion of the sale. This is normally the date that beneficial ownership is intended to pass from the vendor to the purchaser and the time the vendor is entitled to the sale price. In any situation where the closing date is extended through amendments to an original purchase and sale agreement, it is our view that the sale does not occur until the purchase and sale have been completed and the closing date occurs.
Paragraphs 1 to 7 of IT-170R discuss when a sale of property occurs for income tax purposes. As stated in paragraphs 2 and 3, the date of disposition of capital property occurs at the time the vendor is entitled to the sale price and that an amount is included in computing the income of the vendor when the amount is receivable by the vendor. Paragraphs 5, 6 and 7 discuss the timing of a vendor's entitlement to the sale price of property sold. In general, whenever a "condition precedent" remains outstanding, a vendor will not have an absolute right to the sale price of property sold. A "condition precedent" is described as any event that suspends completion of the contract until the condition is met or waived and that could cancel the contract if it is not met or waived. Furthermore, as stated in paragraph 7 of IT-170R, formal agreements of purchase and sale are frequently explicit as to the date of exchange and, unless circumstances indicate that a specified date was changed or was not the true intent of both parties, the date so specified is presumed to be the date of entitlement.
Where an agreement includes a provision stipulating that failure to complete and close a transaction on the closing date results in the agreement becoming null and void and of no legal effect (e.g. assumption of debt on closing), it is our view that the provision is a "condition precedent" to the completion of the agreement. Accordingly, the purchaser would not have acquired the property until the "condition precedent" is satisfied and the closing date occurs.
Yours truly,
Randy Hewlett, B. Comm.
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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