2014-0553131E5 Change in legal title

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.

Author: Hachey, Amanda
Section: 40(1); 40(2)(g); 54; 69(1); 73(1); 248(1); 251.

XXXXXXXXXX
                                                                                                                                                                       2014-055313
                                                                                                                                                                       Amanda Hachey

November 17, 2014

Dear XXXXXXXXXX

Re: “Change in Legal Ownership of Property”

We are writing in response to your letter of October 28, 2014, wherein you requested our comments with respect to a change in legal ownership of property for purposes of the Income Tax Act (the “Act”).

Briefly, as we understand your situation, you currently hold legal title to a house which has been used solely by your former spouse as XXXXXXXXXX principal residence since the breakdown of your marriage.  You indicate that it was the intention of both you and your former spouse that the beneficial ownership of the house would be transferred to your former spouse as a result of the settlement rights arising out of the marriage which occurred several years ago.  You indicate that your former spouse wants to sell the house and you want to know if this will trigger a disposition that results in a capital gain for you.

Our comments

Written confirmation of the income tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular 70-6R6 dated August 29, 2014, issued by the Canada Revenue Agency (CRA).  A fee is charged for this service.  Although we are unable to provide any comments with respect to the specific situation that you have described, otherwise than in the form of an advance income tax ruling, we will provide the following general comments.

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.  A disposition does generally not occur for tax purposes if there is a transfer of title that is not accompanied by the transfer of beneficial ownership.  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.

The determination of whether a person beneficially owns a particular property is primarily one of law the determination of which would require a complete understanding of all the relevant facts and circumstances applicable to a particular situation.  As such, you might want to obtain independent legal advice to confirm that you are not the beneficial owner of the house and/or to find out if there were any other implications, such as land transfer taxes, when beneficial ownership of the house was transferred to your former spouse.

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

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2014

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2014