19 June 1997 External T.I. 9711765 - NO CHANGE IN BENEFICIAL OWNERSHIP - 116(5)

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether subsection 116(5) of the Act would apply where a purchaser only acquires, from the non-resident, legal title to the real property situated in Canada and not beneficial ownership?

Position:

Yes. However, the "cost" for purposes of subsection 116(5) would likely be nominal at it would be based on the FMV of that interest pursuant to subsection 116(5.1) of the Act.

Reasons:

Pursuant to subsection 115(3) of the Act, legal title represents an interest in taxable Canadian property.

	                             	971176
XXXXXXXXXX		                                 Jim Wilson

Attention: XXXXXXXXXX

June 19, 1997

Dear Sirs:

Re: Section 116 of the Income Tax Act (the "Act")

This is in reply to your letter dated April 30, 1997 in which you requested our opinion regarding the application of the above-noted provision of the Act. More specifically, you have described a situation where a U.S. resident and citizen ("Mr. A") owns a cottage property in Canada and plans to add his son ("Mr. B") "to the property title with no transfer of beneficial ownership in order to facilitate estate planning and administration". Mr. A plans to have Mr. B sign a written agreement whereby he acknowledges that there has been no transfer of beneficial ownership.

Paragraph (e) of the definition of the term "disposition" in subsection 54(1) of the Act makes it clear that, for purposes of subdivision c of Division B of Part I, a disposition will not occur as a result of any transfer of property by virtue of which there is a change in legal ownership of the property without any change in the beneficial ownership thereof. It is a question of fact whether there has been a change in beneficial ownership. A written agreement by Mr. B would not, in and by itself, be conclusive evidence that beneficial ownership has not changed. In this regard reference should be made to paragraphs 2 to 5 of Interpretation Bulletin IT-437R for the Department's position on what constitutes beneficial ownership. The Department has not been provided the necessary information to make such a determination.

Subsection 116(5) of the Act applies where a purchaser (e.g. Mr. B) has acquired from a non-resident (e.g. Mr. A) any taxable Canadian property (other than depreciable property or excluded property) under circumstances where the conditions described in paragraphs 116(5)(a) and (b) have not been met. By virtue of subsection 115(3) of the Act, an interest in taxable Canadian property, such as legal title to real property situated in Canada, would constitute taxable Canadian property. Accordingly, even if beneficial ownership has not changed, an acquisition of taxable Canadian property (i.e. an interest in the real estate) may have taken place for purposes of subsection 116(5) of the Act. Pursuant to paragraph 116(5.1)(e) of the Act the cost to Mr. B of his interest in the property for purposes of subsection 116(5) of the Act would be the fair market value of the interest at the time it is acquired.

Regardless that section 116 may apply in these circumstances, where the Department is satisfied that no Canadian tax will be payable as a result of the proposed amendment to legal title of the property, the relevant tax services office, at its discretion, may accept nil or nominal security in order to issue a certificate. The tax services office would, at that time, generally require details as to i) ensure beneficial ownership has not changed, ii) when the beneficial ownership is expected to change and iii) how the Department will be notified when such change in beneficial ownership occurs.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R3, this is not an advance income tax ruling and is therefore not binding on Revenue Canada.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch