14 December 2010 External T.I. 2010-0377971E5 - Capital Property of Deceased Taxpayer

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: Is a deceased taxpayer required to report a capital gain on homes that are in the deceased taxpayer's name but occupied by her children?

Position: Question of fact based on if the taxpayer had "beneficial ownership" of the properties.

Reasons: Paragraph (e) of the definition of "disposition" in subsection 248(1) provides that a disposition does not include any transfer of the property as a consequence of which there is no change in the beneficial ownership of the property.

XXXXXXXXXX
									2010-037797
									A. Townsend

December 14, 2010

Dear XXXXXXXXXX :

Re : Subsection 70(5) of the Income Tax Act - Capital Property of a deceased taxpayer

I am writing in response to your letter of August 9, 2010 asking for our opinion on whether a deceased taxpayer is required to report a capital gain on two properties that are in the deceased taxpayer's name but occupied by her adult children. One of the properties is the taxpayer's previous principal residence (not the principal residence in the year of death) and acreage. Since XXXXXXXXXX , this property has been occupied by one of the taxpayer's daughters and the daughter's spouse, who have paid for renovations to the home and made monthly payments to the taxpayer to live in the home. The other property is a condo purchased in XXXXXXXXXX for another daughter who was unable to obtain financing. The daughter has made monthly cash payments to the taxpayer to cover the cost of the condo, condo fees and taxes. The taxpayer did not charge interest or claim rental income for either of these properties.

Written confirmation of the tax implications inherent in a particular transaction is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. The particular situation outlined in your letter relates to a factual one, involving a specific taxpayer, therefore, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments that may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

Where in a taxation year a taxpayer dies, subsection 70(5) provides that the taxpayer shall be deemed to have, immediately before death, disposed of each capital property of the taxpayer and received proceeds of disposition equal to the fair market value of the property immediately before death. Any resulting taxable capital gain will be subject to tax and reported on the taxpayer's final tax return. A capital gain on the disposition of a taxpayer's principal residence is calculated in accordance with paragraph 40(2)(b).

Paragraph (e) of the definition of "disposition" in subsection 248(1) provides that a disposition does not include any transfer of a property as a consequence of which there is no change in the beneficial ownership of the property. Therefore, if a taxpayer does not have beneficial ownership of a property, the deemed disposition under subsection 70(5) does not apply.

The difference between "beneficial ownership" and "legal ownership" is discussed in Interpretation Bulletin IT-437R - Ownership of Property, Principal Residence. Normally "legal ownership" exists when title is transferred to, recorded in, registered in or otherwise carried in the name of a person. 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. A person's legal ownership of a property may be subject to another person's beneficial ownership of that same property.

Factors that are considered in determining whether a person has beneficial ownership include the right to possession of the property, the right to collect rent, the right to call for the mortgaging of the property, the right to transfer title by sale or by will, the obligation to make necessary repairs, and the obligation to pay property taxes. Not all of these incidents of ownership need to 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.

You are of the opinion that the facts in this case support that the taxpayer was financing the purchase of the two properties with interest free loans and the taxpayer's daughters had beneficial ownership of the properties. Although an accurate conclusion can only be reached after a complete review of all the facts and documentation, your opinion may be difficult to support. The fact that the deceased taxpayer did not report any interest income, had the right to transfer title of the properties by will and was responsible for the property taxes are all factors that indicate the deceased taxpayer had beneficial ownership of the properties. As such, the taxpayer may likely be deemed to have disposed of the properties in accordance with subsection 70(5).

I trust the foregoing is of assistance.

Yours truly,

Guy Goulet CA, M.Fisc.
for Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch