17 June 2014 External T.I. 2014-0533561E5 - Beneficial ownership

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 the change in legal title of the property will trigger a disposition resulting in a capital gain to the taxpayer under the Income Tax Act ("the Act")?

Position: Question of fact and law.

Reasons: The law.

XXXXXXXXXX
. 2014-053356
Amanda Hachey

June 17, 2014,

Dear XXXXXXXXXX

Re: "Beneficial Ownership of Property"

We are writing in response to your letter of May 22, 2014, wherein you requested our comments with respect to ownership of property for purposes of the Income Tax Act (the "Act").

Briefly, as we understand your situation, you and your former spouse jointly purchased a house to use as your matrimonial home sometime in XXXXXXXXXX. However, by the end of XXXXXXXXXX, you and your spouse separated and your former spouse moved out. Ultimately, you were divorced in XXXXXXXXXX.

You indicate that you have resided in the house with your XXXXXXXXXX children since XXXXXXXXXX and have been responsible for paying all of the household expenses such as property tax, utilities, property insurance, maintenance, repairs and major home improvements. Your former spouse has paid the mortgage on the house from the maintenance and support payments otherwise owing to you. Your former spouse has not lived in the house since XXXXXXXXXX. While not entirely clear, it appears that you and your former spouse agreed that you would acquire full ownership of the house as a result of the settlement of rights arising out of the marriage.

In preparation for a possible future sale of the house, you want to have your former spouse's name formally removed from the legal title to the house. You indicate that no consideration will be given by either party for this change and want to know if this will trigger a disposition resulting in a capital gain for your former spouse.

Our comments

Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Ruling, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office ("TSO") during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.

Under the Act, a capital gain accrued on a capital property is triggered when there is a disposition of that 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. One of the requirements for a property to qualify as a taxpayer's principal residence for a taxation year is that it must be "owned" by the taxpayer.

In common law jurisdictions, two forms of property ownership are recognized - legal and beneficial. Normally "legal ownership" exists when title is transferred to, 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. In contrast, 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.

The determination of whether a person beneficially owns a particular property is a mixed question of law/fact that can only be determined after a review of all the facts and circumstances applicable to a particular situation. However, it appears that the beneficial ownership of the house may have been transferred to you at the time of separation/divorce as a result of the settlement of rights arising out of the marriage. If that was the case, then subsection 73(1) of the Act sets out the rules for determining a taxpayer's proceeds of disposition and the purchaser's acquisition price when capital property is transferred from the taxpayer to a spouse or a former spouse in settlement of rights arising out of their marriage. Assuming that the requirements of subsection 73(1) were otherwise met, and an election not to have subsection 73(1) apply was not made, the proceeds of disposition of your former spouse's interest in the house would have been deemed to be equal to its adjusted cost base immediately before the transfer.

Accordingly, assuming that you are the beneficial owner of the house, the transfer of legal title to you would not, in and by itself, result in any income tax consequences to you or your former spouse. However, you might want to obtain independent legal advice to confirm that you are in fact the beneficial owner of the house or to find out if there are any other implications, such as land transfer taxes.

For more information on the principal residence exemption and the concepts of legal and beneficial ownership, please refer to Income Tax Folio S1-F3-C2: "Principal Residence", which can be viewed on the CRA's web site.

We trust our comments will be of assistance.

Yours truly,

Michael Cooke, C.P.A., C.A.
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch