CRA finds that gain realized by a tenant under a rent-to-own program would not qualify for the principal residence exemption

Under a program for a prospective homebuyer to start living in a residence while making contributions towards potential ownership of the property:

• The registered owner would enter into the “Agreement” with an individual tenant (the “Resident”) for the latter to occupy a condo unit (the “Property”), with the option to purchase the Property.
• Under the Agreement, the Resident would pay the owner amounts within a specified range based on the fair market value of the Property in order to obtain an investment with respect to the Property (the “Interest”).
• The amount paid by the Resident each month to the owner would include the market rent for a comparable unit and amounts chosen by the Resident subject to a specified minimum, to be added to the Interest.
• The Resident would occupy Property for a lease term, which was subject to automatic renewal until the option was exercised.
• If the Resident exercised the option to acquire the Property (at an exercise price equalling its current FMV), the Agreement would be terminated, and the Resident would be paid an amount equal to the value of the Interest at that point in time, which would be applied as a down payment towards the acquisition of the Property.
• Where the Agreement was terminated for other reasons, a lesser percentage of the value of the Interest might be paid.

Could the principal residence exemption be claimed by the Resident in relation to a gain realized on repayment of the Interest?

CRA indicated that the payout could not be in respect of the Resident’s beneficial ownership of the Property given that the Resident did not enjoy and assume all the attributes of ownership of the Property. For example, there was no ability to mortgage it, or rent it out or make structural changes or to transfer the Interest without prior consent.

Furthermore, it also would not be for the disposition of the Resident’s leasehold Interest but rather was paid in respect of the value of the Interest.

In addition, on entering into the Agreement, the Resident would not be considered to have acquired a qualifying home for purposes of the Home Buyers’ Plan, although this requirement could be satisfied by exercising the option.

Neal Armstrong. Summaries of 20 November 2023 External T.I. 2022-0937331E5 under s. 54 – principal residence, s. 146.01(1) - regular eligible amount, and General Concepts - Ownership.