6 January 1999 Internal T.I. 9827567 - BENEFICIAL OWNERSHIP - BARE TRUST

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: Who is the beneficial owner of the property?

Position: The taxpayer who has the incidents of title.

Reasons: The taxpayer has all the incidents of the title such possession, use and risk of the property. No trust agreement (“bare trust”) but can be viewed as a conditional sale agreement.

		January 6, 1999

	Vancouver Island Tax Services Office	Trusts Section
	Business Services	M. Lemire
	1415 Vancouver Street	(613) 957-4363
	Victoria BC  V8V 3W4

	Attention:  Bonnie Hilland	982756

Beneficial ownership/Capital gain on sale of real property

We are writing in reply to your memorandum of October 15, 1998 wherein you requested our comments as to which of the taxpayers in the scenario described below is responsible for tax on the gain realized on the sale of the property.

Facts

Our understanding of the facts is as follows:

In XXXXXXXXXX purchased a real property registered in his name for the use and benefit of XXXXXXXXXX The purchase was partly financed with a mortgage from a financial institution. The balance (hereafter the “closing costs”) was paid by XXXXXXXXXX satisfied herself as to the property prior to the purchase, received the keys and moved into the property shortly after the purchase. XXXXXXXXXX has never seen the property and has no right to visit or to inspect the property unless invited by XXXXXXXXXX. In XXXXXXXXXX entered into a written agreement which provides the following:

a) XXXXXXXXXX will continue to have possession of the property from her date of occupancy for as long as she continues to uphold the terms of the agreement;

XXXXXXXXXX will be responsible for the payment of insurance, repairs, property taxes, strata fees, utilities and services. XXXXXXXXXX will also hold XXXXXXXXXX safe and harmless and will indemnify him from any claim with respect to the property. Finally, XXXXXXXXXX will pay in a bank account under the name of XXXXXXXXXX at least $XXXXXXXXXX/month until full repayment of the closing costs and mortgage payments paid by XXXXXXXXXX;

b) XXXXXXXXXX will be responsible for the monthly mortgage payments until the property is transferred to XXXXXXXXXX;

c) The property will be transferred to XXXXXXXXXX when she has paid in full the closing costs, all mortgage payments made by XXXXXXXXXX and XXXXXXXXXX legal fees relating to the transfer; and

d) Any profits in the property belong to XXXXXXXXXX.

In XXXXXXXXXX initiated the sale of the property and negotiated and arranged an agreement with a real agent. On XXXXXXXXXX direction, XXXXXXXXXX accepted an offer and the property was sold to a third party in XXXXXXXXXX. The net sale proceeds went to XXXXXXXXXX after paying out the real estate commission, the mortgage, the closing costs and the legal fees related to the sale.

You are being asked to confirm that the agreement described above is a trust agreement under which XXXXXXXXXX holds the legal title in trust for XXXXXXXXXX which should be viewed as a “bare trust” for the purposes of the Act. Consequently, XXXXXXXXXX should be responsible for income tax on any gain on the sale of the property. You are of the view that the arrangement is not a trust arrangement but is more in the nature of an agreement for sale and does not confer beneficial ownership to XXXXXXXXXX.

We understand that if the gain is taxed in XXXXXXXXXX hands, it would adversely impact his disability pension. On the other hand, if XXXXXXXXXX is viewed as the beneficial owner of the property, she will be in a position to claim the principal residence exemption to reduce or eliminate the tax consequences arising on the sale of the property.

Our Comments

Interpretation Bulletin IT-437R - Ownership of property (principal residence)

IT-437R discusses the concepts of “legal ownership” and “beneficial ownership” as recognized by the common law jurisdictions in order to determine ownership of property for the purpose of claiming the principal residence exemption. Paragraph 4 of IT-437R described the term “beneficial ownership” as being “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. For example, beneficial ownership frequently arises when property is held in trust for a person in circumstances where, according to the terms of the trust, that person has authority to instruct the trustee to deal with the property as requested...” Paragraph 5 of the IT also states that “in determining whether a person has beneficial ownership, 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 will, the obligation to repair, the obligation to pay property taxes and other relevant rights and obligations.” Finally, paragraph 14 of the IT provides that a “taxpayer is considered to be the beneficial owner of the housing unit where the agreement is a conditional sales contract.”

Interpretation Bulletin IT-285R2 - Capital Cost Allowance - General Comments

Paragraph 17 of IT-285R2 further provides that a taxpayer will be considered to have acquired a depreciable property “at the earlier of (a) the date on which title to it is obtained, and (b) the date on which the taxpayer has all the incidents of ownership such as possession, use, and risk, even though the legal title remains in the vendor as security for the purchase price (as is commercial practice under a conditional sale agreement).”

Existence of a trust

The existence of a trust is determined by the relationship between the settlor, the trustees and the beneficiaries. The relationship may or may not be defined by a formal written document but is codified by any applicable trust legislation and common law. It is accepted at law that a trust cannot be established unless three certainties are present. That is, the attempt to establish a trust will fail unless it is certain that the settlor intended to bring a trust relationship into existence and both the property and the beneficiaries or other objects of the trust are described with sufficient certainty. Whether the three certainties are present or not is a question of fact and particular to the circumstances of each case, however given the requirement of these three certainties, a written trust document would serve as the best evidence of their existence and would resolve any ambiguities which may otherwise arise.

The certainty of intention is established where it is clear that a trust relationship was intended as opposed to some other relationship such as an agency, or a transfer, or gift of property is intended. The property, or property substituted therefor must be clearly identifiable in order for that certainty to exist. Lastly, in creating a valid trust, the beneficiaries must be identifiable.

Bare Trust

The Department’s position on “bare trusts” is set out in the Income Tax Technical News #7 of February 21, 1996. For this position to apply, there must be a trust under common law and three other conditions must be satisfied: (a) the trustee must have no significant powers or responsibilities, and can take no action without instructions from the settlor; (b) the trustee’s only function is to hold legal title to the property; and (c) the settlor is the sole beneficiary and can cause the property to revert to him at any time.

The present case

We agree with your interpretation that the written agreement would not constitute a trust agreement. Even if it could be argued that there is a trust under common law in the present case, it is our view that the trust would not be viewed as a bare trust for tax purposes as the third condition set out above for a trust to be a bare trust is not satisfied. Under the terms of the agreement, XXXXXXXXXX cannot cause the property to “revert” to her at any time.

For the property to revert to XXXXXXXXXX, she would have to be the settlor under the trust. Even if she could be viewed as the settlor under the trust, the property cannot be transferred to her unless she has repaid XXXXXXXXXX. However, although the concept of beneficial ownership often arises when property is held “in trust” for a person, as indicated in paragraph 4 of IT-437R, we are of the opinion that the existence of a trust is not necessary for a person to be viewed as having the beneficial ownership of a property. In the present case, it is our view that the arrangement can be treated as a conditional sale agreement and that XXXXXXXXXX can be viewed as the beneficial owner of the property as she has the incidents of ownership such as possession, use and risk of the property (e.g. the right to possession, the obligation to repair, the obligation to pay all the expenses related to the property).

For your information a copy of this letter will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department’s mainframe computer. 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 LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.

We trust our comments will be of assistance to you.

Theresa Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch