5 January 2011 External T.I. 2010-0385711E5 - Transfer of Property

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: 1. Whether the transfer of legal title of a cottage held in a personal trust from an Aunt's name to her nieces and nephew will trigger a disposition and a capital gain.
2. Who must report the capital gain?
3. Can a personal trust use the principle residence exemption?

Position: 1. Depends on whether there is a change in the beneficial ownership.
2. The specified beneficiary of the property.
3. Yes.

Reasons: If there is no change in the beneficial ownership, then no disposition has occurred, and no taxable capital gain, in accordance with the definition of disposition under section 248. If there is a change of beneficial ownership then a capital gain may be triggered, but the tax could be sheltered if the property meets the criteria for the principal residence exemption.

XXXXXXXXXX
						2010-038571
						J. Nichols
January 5, 2011

Dear XXXXXXXXXX :

Re: Transfer of Property

I am writing in reply to your letter dated October 14, 2010, requesting our assistance in determining whether a change in legal title on the family cottage held in trust would result in a capital gain when an Aunt's name is removed from legal title and replaced with the names of her nieces and nephew. You indicated that the property was originally owned by your grandfather and was bequeathed in a personal trust for the use by your Aunt, her brother and his family.

Our Comments

Written confirmation of the tax implications inherent in particular transactions may only be 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 Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the CRA website. We are, however, prepared to provide the following general comments.

The tax implications of the situation you describe depend, in part, on whether there is a "disposition" as defined in section 248(1) of the Income Tax Act. The definition describes various types of dispositions, however, specifically excludes therefrom "any transfer of the property as a consequence of which there is no change in the beneficial ownership of the property". As such, if the facts show there is no change to the beneficial owner of a property, then a change of title, in and of itself, would not cause a disposition to occur, and a capital gain would not be triggered.

Interpretation Bulletin IT-437R, Ownership of Property (Principle Residence), sets out the guidelines for how to determine when a property is held under a beneficial or legal ownership. As noted in paragraph 4, "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 by will, the obligation to repair, the obligation to pay property taxes and other relevant rights and obligations. Not all of these incidents of ownership need occur concurrently before it is concluded that the person has beneficial ownership of the property, which is a question of fact in each particular case". This publication is available on our website at http://www.cra-arc.gc.ca/E/pub/tp/it437r/README.html

Where there is a change in beneficial ownership of a principal residence, the gain may be sheltered from taxation, even when it is held in a personal trust. Interpretation Bulletin IT-120R6 Principle Residence provides guidance on the exemption to eliminate or reduce a capital gain on a principle residence. As noted in paragraph 35, a personal trust can generally claim the principle residence exemption; however the personal trust must list the persons that are beneficially interested and those that ordinarily inhabit the housing unit. The personal trust must select a "specified beneficiary", who can claim however, only one property in the year as his or her principle residence for purposes of the exemption.

As discussed above, the determination of whether a person has beneficial ownership of a property is a question of fact that can only be determined after a review of all the relevant documents and the circumstances applicable to a particular situation. As the subject matter of your inquiry involves questions of facts, you may wish to contact the local TSO for assistance.

We trust that these comments will be of assistance.

Yours truly,

Randy Hewlett
Manager
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch