20 November 2023 External T.I. 2022-0937331E5 - New Housing Model and Beneficial Interest

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: Where an individual who has an investment in relation to a property and where the individual does not have legal title in the Property: 1. Does the individual have beneficial ownership or a leasehold interest in the Property so that a gain on the disposition of the investment can qualify for the principal residence exemption? 2. Whether the individual is considered to have acquired a "qualifying home" for purposes of the Home Buyers' Plan?

Position: 1. Question of fact but in our view the individual does not have beneficial ownership interest in the Property and the individual is likely not receiving an amount to terminate a leasehold interest in a housing unit. 2. When the individual enters into the Agreement, it is our view that the individual does not obtain a legal or beneficial ownership interest in the Property therefore they would not be considered to have acquired a “qualifying home” for purposes of the HBP. However, if in the future the individual exercises their option under the Agreement and acquires the Property, the individual may be able to participate in the HBP, providing all other conditions are met.

Reasons: 1. See comments.

XXXXXXXXXX									2022-093733
S. D’Angelo, CPA, CMA

November 20, 2023

Dear XXXXXXXXXX:

Re: Principal Residence Exemption

We are writing in response to your submissions of May 25, 2022, and further to our subsequent meetings concerning a housing model that provides for a prospective homebuyer to live in a property while making contributions towards their potential ownership of the property. XXXXXXXXXX. You have requested our views on whether any gain realized by the prospective homebuyer at repayment of their investment would qualify for the principal residence exemption and whether that individual is considered to have acquired a “qualifying home” for purposes of the Home Buyers’ Plan (“HBP”).

A summary of some of the pertinent information as submitted is as follows:

• A Corporation acting as an agent on behalf of the owner (“Owner”) of a condominium unit (the “Property”), enters into a XXXXXXXXXX Agreement (“Agreement”) with an individual tenant (“Resident”) to occupy the Property with the option to purchase the Property.
• The Corporation charges administration fees for its services.
• The Owner is the only registered owner of the Property.
• Per the Agreement, the Resident pays the Owner a minimum XXXXXXXXXX of XXXXXXXXXX of the fair market value of the Property (“XXXXXXXXXX”) in order to obtain an investment with respect to the Property (“XXXXXXXXXX Interest”).
• Every month, the Resident pays an amount (the “XXXXXXXXXX Payment”) to the Owner which includes the market rent of a comparable unit, and a minimum XXXXXXXXXX to be added to the XXXXXXXXXX Interest. The Resident can choose to increase the XXXXXXXXXX each month to be added to the XXXXXXXXXX Interest.
• XXXXXXXXXX
• The Resident has the exclusive right and privilege to occupy the Property as a single family dwelling for a XXXXXXXXXX lease term (the “Initial Term”) and agrees not to lease, sublease or licence the Property without the consent of the Corporation.
• The Agreement may be terminated by either the Owner or Resident in which case the Resident will receive a payment XXXXXXXXXX. The amount of the XXXXXXXXXX will vary, and is dependent on why and by who the Agreement is terminated. XXXXXXXXXX..
• After XXXXXXXXXX, the Resident has the option of buying the Property at its fair market value as determined at that time. If the Resident exercises the option, the Agreement is terminated XXXXXXXXXX Interest XXXXXXXXXX. The Resident would then obtain mortgage financing for the Property, and legal title of the Property would be transferred to the Resident pursuant to a purchase and sale agreement.
• Upon expiration of the Initial Term, if the option is not exercised, the Agreement automatically renews for additional successive XXXXXXXXXX terms.
• At any point in time, XXXXXXXXXX. If the fair market value of the Property has increased, at repayment XXXXXXXXXX, the Resident may experience a gain on their XXXXXXXXXX Interest. Similarly, if the fair market value of the Property decreases, the Resident may experience a loss on their XXXXXXXXXX Interest.

Specifically, you have asked whether the principal residence exemption could be claimed by the Resident to reduce or eliminate any capital gain otherwise realized on the repayment of the XXXXXXXXXX Interest. You have also asked whether the Resident is considered to have acquired a “qualifying home” for purposes of the HBP.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (“Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Ownership

Generally, under the Act, a capital gain is triggered when there is a disposition of a capital property. If a property qualifies as a taxpayer’s principal residence, an exemption can be claimed to reduce or eliminate any capital gain otherwise realized on the disposition of the property. “Principal residence” is defined in section 54 of the Act and includes, among other things, a property that is a housing unit or a leasehold interest in a housing unit that the individual (or certain family members) ordinarily inhabited in the year. A housing unit can include a house; an apartment or a unit in a duplex, apartment building, or a condominium; a cottage; a mobile home; a trailer or a houseboat.

Further, as indicated in the definition of principal residence in section 54 of the Act (and in paragraph 2.9 of Income Tax Folio S1-F3-C2: Principal Residence (“Folio”), for a property to qualify as a taxpayer’s principal residence for a taxation year, it must be “owned” by the taxpayer. Paragraph 2.86 of the Folio further explains that “for purposes of claiming the principal residence exemption for a property, the section 54 definition of principal residence requires that the taxpayer own the property jointly with another person or otherwise. These words include sole ownership, joint tenancy, tenancy-in-common and co-ownership.”

In common law jurisdictions, two forms of property ownership are recognized – legal and beneficial. Normally, legal ownership exists when title is recorded in, registered in or otherwise carried in the name of a person. Legal owners are generally entitled to enforce their ownership rights against all other persons. However, in common law jurisdictions, one person’s legal ownership of a property may be subject to another person’s beneficial ownership of that property. The term “beneficial ownership” is used to describe the type of ownership of a person who is entitled to the use and benefit of the property whether or not that person has concurrent legal ownership. A person who has beneficial ownership rights but not legal ownership can enforce those rights against the holder of the legal title.

You have stated that the Owner is the sole legal registered owner of the Property. As such, in order for the Resident to be considered to have ownership (joint or otherwise) of the Property, they must have a beneficial ownership interest in the Property, which you indicate is evidenced by their XXXXXXXXXX Interest.

Beneficial ownership is generally determined in accordance with the ordinary meaning found in common law. The concept has been considered by the Canadian courts, which support that the primary attributes of beneficial ownership are: possession, use, risk and control. In the Tax Court of Canada case of Prévost Car Inc. v. The Queen, 2008 TCC 231, the court said at paragraph 100 that the beneficial owner “is the person who enjoys and assumes all the attributes of ownership.”

When determining whether a person has beneficial ownership of a housing unit, and as explained in paragraph 2.81 of the Folio, “...one should consider such factors as the right to possession, the right to collect rents, the right to call for the mortgaging of the property, the right to transfer title by sale or by will, the obligation to repair, the obligation to pay property taxes and other relevant rights and obligations.” However, as noted in the same paragraph, “Beneficial ownership must be distinguished, however, from the other types of physical possession of property which a person may enjoy. For example, a tenant of a property, or a person who is allowed to occupy it only because the true owner has no objection, is not the beneficial owner of the property.”

The determination of whether a person beneficially owns a particular property can only be determined after a review of all the facts and circumstances applicable to a particular situation. However, we can provide the following comments based on a review of the terms and conditions in the Agreement. It is our view that while the Resident might experience some risk from their XXXXXXXXXX Interest associated with the fluctuation in the value of the Property, they do not enjoy and assume all the attributes of ownership of the Property. For example, the Resident does not have the ability to rent out (lease or sublease) the Property (without obtaining prior consent from the Corporation) and the Resident does not have the right to call for the mortgaging of the Property until they exercise their option to Purchase the Property. The Resident is not able to make structural alterations, additions or other changes to the interior of the Property without the prior written consent of the Corporation. The Resident must use the Property as a single family dwelling, must notify the Corporation of any damages to the Property and must obtain approval of the Owner if they wish to transfer or sell their XXXXXXXXXX Interest. While the XXXXXXXXXX Payment that is paid by the Resident also includes a portion for expenses that are attributable to the operating cost of the Property (“Property Expenses”), such as property taxes and insurance on the Property, the obligation and liability for the Property Expenses rest with the Owner.

As such, it is our view that the Resident does not have a beneficial ownership interest in the Property and therefore, would not qualify for the principal residence exemption on any gain resulting from the repayment of the XXXXXXXXXX Interest by virtue of ownership, joint or otherwise, of the Property.

Leasehold Interest

We have also considered whether a leasehold interest in a housing unit exists and whether a resulting gain from the termination of the Agreement and the payment of the XXXXXXXXXX Interest to the Resident could be eligible for the principal residence exemption. Generally, a leasehold interest is the interest of a tenant in a leased tangible property. Further, in order for a leasehold interest to exist, a taxpayer must have exclusive possession of the housing unit; the lease must have a beginning and an ending; and the taxpayer must pay rent. It is our view that in the current fact situation, the conditions to determine the existence of a leasehold interest are likely met.

A determination of whether an amount paid is for the termination of a lease is a question of fact and law and terms of the lease. In the situation you have presented, according to the Agreement, the XXXXXXXXXX is made to the Resident regardless of whether the Agreement is terminated by the Owner or the Resident and is paid based on the formula and terms as dictated in the Agreement. While the amount of the XXXXXXXXXX will vary depending on why the Agreement is terminated, all of the XXXXXXXXXX amounts are calculated as an amount equal to the Resident’s XXXXXXXXXX Interest, a percentage of the Resident’s XXXXXXXXXX Interest or calculated with reference to the Resident’s XXXXXXXXXX. Further, if the Resident exercises the option to acquire the Property, the Agreement is terminated and the Resident will be paid a XXXXXXXXXX equal to their XXXXXXXXXX Interest at that point in time, which will be applied as a down payment towards the acquisition of the Property.

Therefore, based on our review of the Agreement as provided to us, and for the reasons discussed above, it is our view that the XXXXXXXXXX paid to the Resident is likely not paid to terminate the leasehold interest in the Property but rather is an amount paid in respect of the XXXXXXXXXX Interest or the XXXXXXXXXX. As such, any gain resulting from the XXXXXXXXXX (i.e., on the repayment of the XXXXXXXXXX Interest) will not be considered a gain for the termination of a leasehold interest in a housing unit for purposes of the principal residence exemption.

Home Buyer’s Plan

Very generally, the HBP allows an individual to withdraw from their registered retirement savings plan to buy or build a home provided that the conditions set out under section 146.01 of the Act are met. Two of the relevant conditions of the HBP are that the individual must enter into an agreement in writing for the acquisition or the construction of a “qualifying home,” which generally means a housing unit located in Canada, and the individual must acquire the qualifying home (or a replacement property for the qualifying home) before October 1st of the year following the year of the HBP withdrawal. It is the CRA’s position that an individual who acquires a part interest in a housing unit may qualify under the HBP, provided the other conditions of participation are met.

For purposes of the HBP, among other criteria, the CRA will consider an individual to have acquired a “qualifying home” if the individual obtains either legal ownership (i.e., title) or beneficial ownership of the home. When the Resident enters into the Agreement, it is our view that the Resident does not obtain a legal or beneficial ownership interest in the Property and therefore, they would not be considered to have acquired a “qualifying home” for purposes of the HBP. However, if in the future the Resident exercises their option under the Agreement and acquires the Property, the Resident may be able to participate in the HBP, providing all other conditions are met.

We trust our comments will be of assistance.

Yours truly,

Pamela Burnley, CPA, CA
Manager
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 XXXXXXXXXX.