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 or not a person "beneficially owned" a property at the time of disposition.
Position: In this case, likely yes.
Reasons: The attributes of "beneficial ownership" are evidenced by the conduct of the parties and supporting documents.
June 24, 2009
XXXXXXXXXX TSO HEADQUARTERS
XXXXXXXXXX James Atkinson CGA
XXXXXXXXXX (519) 457-4832
Attention: XXXXXXXXXX , Audit Division
2009-032485
Beneficial Ownership of Real Property
This is in response to your memorandum dated May 26, 2009 concerning an unreported disposition of real property. Your referral, which has arisen as a consequence of the audit of the XXXXXXXXXX personal income tax return of XXXXXXXXXX ("Taxpayer"), concerns the ownership of certain real property. Legal title of the property disposed of was registered in the Taxpayer's name. However, the Taxpayer contends that the property was beneficially owned by his brother, XXXXXXXXXX ("Brother").
We have reviewed your submission, which includes copies of documentation evidencing the sale transaction, and, representations and documentation submitted by XXXXXXXXXX ("Rep"). The Rep is a lawyer who acted on behalf of Brother in respect of the sale of the property.
Based upon our review of the submissions and the documents provided, our understanding of the facts and circumstances is as follows:
1. The Taxpayer purchased a residential property known as XXXXXXXXXX (the "Old Property") for the sum of $XXXXXXXXXX on XXXXXXXXXX . Legal title to the property was registered in the Taxpayer's name. The Taxpayer contends that the property has remained in his name for convenience sake, although it was his intention to be helpful to his mother and brother and transfer the Old Property's title to them.
2. Following the purchase of the Old Property, the Taxpayer resided there with his mother and Brother. However, in or about XXXXXXXXXX , the Taxpayer moved out of the Old Property and into a new house with his wife. The Taxpayer's mother and Brother continued to reside at the Old Property. Brother continued to reside in the Old Property with his mother until she was transferred to a seniors' home. Subsequently, upon her death, Brother listed the property for sale with the realtor XXXXXXXXXX ("Realtor").
3. On XXXXXXXXXX , Brother entered into a purchase and sale agreement, as vendor, to sell the Old Property to XXXXXXXXXX ("Purchasers") for consideration of $XXXXXXXXXX , with a closing date of XXXXXXXXXX . Brother also executed a subsequent Amendment to Agreement, dated XXXXXXXXXX , in which the closing date was changed from XXXXXXXXXX to XXXXXXXXXX . All legal contracts bear Brother's name and signatures.
4. In XXXXXXXXXX , Brother purchased a new residence known as XXXXXXXXXX (the "New Property") prior to the closing of the Old Property. XXXXXXXXXX ("Bank") provided Bridge Financing for that acquisition, by document dated XXXXXXXXXX , in the amount of $XXXXXXXXXX . The Bank accepted as security the anticipated proceeds from the pending sale of the Old Property.
5. When the title to the Old Property was searched, it was discovered that the Taxpayer's name remained on title. Rather than incur further registration costs, the Taxpayer states that he signed the sale documents and assigned the net proceeds to Brother. In this respect, the Taxpayer provided the Rep with a direction at the time of the sale, dated XXXXXXXXXX , wherein it is stated:
"Re: [Taxpayer] sale to [Purchasers]
I, [Taxpayer], hereby direct [Rep] to pay the net sale proceeds from the above noted transaction to my brother, [Brother], as it is his house."
6. A letter on the Bank letterhead, addressed to the Rep, dated XXXXXXXXXX , subsequent to the closing of the Old Property's sale, refers to Brother's outstanding obligation from the bridge loan as the "[Brother] Bridge Loan".
7. Documentation on the letterhead of insurers, XXXXXXXXXX , indicates that Brother was the policyholder of insurance on the Old Property.
8. The Realtor provided the Rep with an invoice for the real estate commission pertaining to the sale of the Old Property between, as stated in the invoice, "[Brother] to [Purchasers]".
9. The Rep's reporting letter, in respect of the sale of the Old Property is addressed to Brother and names Brother as the vendor. The accompanying statement of adjustments indicates that the net proceeds from the sale (i.e., after repayment of the Bank financing for the New Property, the Realtor real estate commissions, and legal fees) were paid to Brother as the "balance of funds". The reporting letter and statement of adjustments thereby confirm that the proceeds from the sale of the Old Property paid for the New Property.
Brother passed away in XXXXXXXXXX . According to the Rep, Brother's then principal residence, the New Property, was sold with the net closing proceeds forming part of the Estate of Brother. You have requested our views relating to the legal concept of "beneficial ownership" as it relates to the Old Property. More specifically, you have asked our opinion on whether or not Brother was the beneficial owner of the Old Property, and whether the capital gain arising therefrom should be attributed to him.
TSO Position
In your view, the Taxpayer had both legal and beneficial ownership of the Old Property. Accordingly, any capital gain that results from the disposition of the Old Property in XXXXXXXXXX is attributable to the Taxpayer.
You have based your decision on the guidelines for determining ownership of property, as found in IT-437 Ownership of Property (Principal Residence). You have also considered technical interpretations issued regarding the issue of "beneficial ownership". You have observed that those documents customarily state that the determination is a question of fact that can only be determined after a review of all the documents and the circumstances.
In arriving at your conclusion that the Taxpayer had beneficial ownership of the Old Property you have placed considerable reliance on the absence of an (trust) agreement, and the assertion that Brother was unable to sell the property on his own, as evidenced by the actions of the Taxpayer and the direction provided to the Rep.
Taxpayer's Position
It is the Taxpayer's position that Brother beneficially owned the Old Property. Reliance has been placed on the written direction that the Taxpayer provided the Rep at the time of the sale, dated XXXXXXXXXX , specifically referring to the statement "as it is his house".
Other actions taken by Brother, consistent with the notion that he was the beneficial owner include the payment of realty taxes, and insurance on the property and the fact that Brother's name is listed as the owner on the purchase and sale agreement and all ancillary agreements and billings (i.e., bridge financing, commission expenses, lawyers reporting letter on the closing of the sale).
The term "beneficial ownership", which is used in common law is to distinguish the rights enjoyed by persons with a beneficial interest in property from those enjoyed by the legal titleholder to that property, is not defined in the Income Tax Act. The CRA takes the position in IT-170R, Sale of Property - When Included in Income Computation, that possession use and risk are primary attributes of beneficial ownership. 1 The CRA has also stated, in IT-437R, Ownership of Property (Principal Residence), that in the context of a principal residence, that the right to transfer title of the property by sale is a right it considers to flow from beneficial ownership. 2
The Supreme Court of Canada in R. A. Jodrey Estate v. Minister of Finance (Nova Scotia), 81 DTC 5344, adopted this definition of "beneficial owner":
It seems to me that the plain ordinary meaning of the expression "beneficial owner" is the real or true owner of the property. The property may be registered in another name or held in trust for the real owner, but the "beneficial owner" is the one who can ultimately exercise the rights of ownership in the property. 3
This passage was cited with approval in the Tax Court of Canada decision in Prévost Car Inc., 2008 TCC 231 (affirmed by the Federal Court of Appeal, 2009 DTC 5053). Rip, A.C.J. concluded that the "beneficial owner" [in the instance of a dividend] is the person who assumes and enjoys all of the attributes of ownership of such dividend, including "control" of the dividend received.
As you have noted, the determination of whether a person beneficially owns a property is a question of fact that can only be determined after a review of all the documents and the circumstances applicable to a particular situation. In this regard, the intent of the parties as expressed in documents, their actions and handling of the property is vital for determining ownership.
In the circumstances described, Brother appears to have enjoyed all of the attributes of ownership of the Old Property. This conclusion is primarily based on the fact that he used the Old Property as his residence, retained the proceeds from the sale of the Old Property, and, ultimately, was able to effect the transfer of the Old Property to the new owners. We acknowledge that the Taxpayer had to effectively "sign off" on the transfer because legal title was in his name. However, the Taxpayer appears to have acted upon Brother's direction, subsequent to the listing of the property. Moreover, the Taxpayer provided written direction to the Rep in XXXXXXXXXX indicating that the Old Property was his brother's and that all proceeds should be directed to him.
The facts indicate that Brother resided at the Old Property since XXXXXXXXXX , a period of XXXXXXXXXX years until it was sold in XXXXXXXXXX . Brother also maintained insurance on the Old Property. We therefore conclude that Brother enjoyed possession and use of the Old Property. The fact that Brother insured the property suggests that he had an insurable interest in the property, consistent with the notion that he had an ownership interest in the property.
The contracts that effected the sale (i.e., purchase and sale agreement and amendments thereto), and the ancillary contracts in connection with the sale (i.e., listing contract with the Realtor, bridge financing contract with the Bank, and the legal services with the Rep who provided a final reporting letter and statement of trust accounts) consistently name Brother as, and thereby represent him to be, owner of the Old Property.
You have mentioned that there was no apparent trust agreement that might otherwise evidence beneficial ownership. In our view, a trust agreement would only evidence the intent to transfer beneficial ownership or the incidents thereof. Whether or not a person has the ultimate exercise of the rights of the property remains a question of fact. The mere existence of a trust agreement, in and of itself, is not determinative in answering the question whether or not a particular person has beneficial ownership of a property.
Finally, a determination that Brother did not have beneficial ownership would imply that Brother occupied the Old Property merely as a tenant. The incidents of a landlord-tenant relationship generally include rent, a contract for consideration and reversion of the property in the landlord. It is plausible, in certain fact situations, that the payment of residential maintenance costs (i.e., property taxes, utilities and maintenance) could be considered as payment in lieu of rent by a tenant to a landlord. However, in the case at hand, other incidents (i.e., such as a rental contract and reversion of the property) of such a relationship are not evident. We view the fact that the property did not revert to the Taxpayer, upon Brother vacating the property, particularly compelling in arriving at a conclusion that Brother was not a tenant and that Taxpayer was not a landlord.
In conclusion, based on the facts presented, in our view, Brother was the beneficial owner of the Old Property. Accordingly, any capital gain attributable to the period that he owned the Old Property would be reportable by Brother in XXXXXXXXXX , the year of disposition, subject to any deduction which may otherwise be available in respect of the principal residence exemption.
We trust these comments are of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 At paragraph 8.
2 At paragraph 4.
3 At paragraph 47.
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