2016-0647461E5 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 a 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.

Reasons: See below.

Author: Couvrette, Amanda
Section: 40(1); 54; 69(1); 248(1)

XXXXXXXXXX                                                                                                           Amanda Couvrette
June 14, 2016


Re: Beneficial ownership of a principal residence

This is in response to your request dated May 9, 2016, and our subsequent telephone conversation (Couvrette/XXXXXXXXXX), wherein you requested our views on whether the transfer of the legal title of a property is considered a disposition of that property under the Income Tax Act (the “Act”).

Briefly, you indicate that your clients (Mr. and Mrs. X) purchased a property as their principal residence in XXXXXXXXXX.  Due to financial difficulties, your clients could no longer qualify to refinance the original mortgage when it came due in XXXXXXXXXX.  As such, the legal title of the property was transferred to Mr. X’s parents in XXXXXXXXXX for $XXXXXXXXXX and the mortgage was renewed in Mr. X’s parents’ name.  However, you also indicate that your clients have continued to make all the mortgage payments; have paid all other costs related to the property; and have continuously lived in the property since XXXXXXXXXX.  You maintain that the beneficial ownership of the property remained with your clients.  Your clients’ financial situation has now improved and they would like to transfer legal title of the property back into their names.  You want to know if the transfer of legal title will trigger any income tax consequences for your clients or Mr. X’s parents.

Our Comments

This technical interpretation provides general comments about the provisions of the “Act” and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.

Under the Act, a capital gain accrued on a capital property is triggered when there is a disposition of that property.  A taxpayer’s principal residence is normally considered to be a capital 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 that 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 and fact that can only be determined after a review of all the facts and circumstances applicable to a particular situation.  However, based on our understanding of the facts, it appears that your clients likely remained as the beneficial owners of the property.  If that is the case, then the transfer of legal title of the property back to your clients would not, in and of itself, result in any income tax consequences although you might want to obtain independent legal advice as to whether 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 Canada Revenue Agency’s web site.

We trust our comments will be of assistance.

Yours truly


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

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