2018-0790251I7 45(2) election and beneficial ownership

Principal Issues: Question 1: Whether both spouses are required to file a subsection 45(2) election in a scenario where only one spouse has beneficial ownership of the property. Question 2: Does filing a subsection 45(2) election for a property require the taxpayer to designate the property as their principal residence?

Position: 1) No, however, additional factors should be considered in determining whether or not the spouse holds beneficial ownership in the property. 2) No.

Reasons: The law.

Author: Ross, Matthew
Section: 45(1); 45(2); 74.1(1); 74.2(1)

                                                                                                                 May 9, 2022

Small and Medium Enterprises Directorate                                              HEADQUARTERS

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                                                  Matthew Ross, CPA, CA
                                                                                   (902) 399-8396

                                                                                   2018-079025

Attention: Wayne Wou

Re: Subsection 45(2) Election by Spouses with Joint Legal Title

We are writing in response to your email of December 18, 2018 regarding an election under subsection 45(2) of the Income Tax Act (the “Act”) by a husband and wife. In particular, you have asked us for clarification on whether both spouses are required to file the election in respect of a particular property. You have also asked us to confirm whether filing the election in respect of the property requires the owner(s) to designate that property as their principal residence.

In the situation you presented, the spouses purchased a housing unit (the “Home”) in 2006 which they used as their primary residence until 2015. In 2016, the spouses moved out and started using the Home to earn rental income. Both spouses are on the title of the Home, however, the husband provided all funds for the purchase of the Home and has reported all rental income from the Home on his tax return. The spouses would like to file a late election under subsection 45(2) of the Act with respect to the change in use of the Home.

Our Comments

Pursuant to subsection 45(1) of the Act, where a taxpayer has acquired a property for their personal use and later begins to use the property for an income earning purpose, the taxpayer is deemed to have disposed of the property for its fair market value and reacquired it immediately thereafter at the same amount. However, the taxpayer may instead defer recognition of any gain to a later year by electing under subsection 45(2) of the Act to be deemed not to have made the change in use of the property.

In common law jurisdictions, two forms of property ownership are recognized - legal and beneficial. As noted in Income Tax Folio S1-F3-C2, “Principal Residence” (the “Folio”), in common law jurisdictions, “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. By contrast, the term “beneficial ownership” is used to describe the type of ownership of a property by a person who is entitled to the use and benefit of the property whether or not that person has concurrent legal ownership. A person who has beneficial ownership but not legal ownership can enforce their ownership rights against the holder of legal title.

The determination of whether a person beneficially owns a particular property is a mixed question of fact and law that can only be determined after a review of all the facts and circumstances applicable to a particular situation. The fact that the wife did not contribute financially towards the purchase of the Home is not necessarily indicative of whether or not she holds a beneficial interest in the property. There is generally a presumption that the holder of legal title of a property is also the beneficial owner of the property, unless the facts support otherwise. Please refer to the Folio, which is on the Canada.ca website, for factors that should be considered when determining whether someone has beneficial ownership.

Generally speaking, beneficial ownership represents ownership of a property under the Act. As such, for purposes of subsection 45(1) of the Act and the election under subsection 45(2), the taxpayer referred to would typically be the beneficial owner of the property, whether such ownership is jointly held with another person or otherwise. Therefore, if both spouses are considered to have beneficial ownership of the Home, they would both be required to file the election under subsection 45(2) in respect of the Home.

To answer your second question, a property that otherwise meets the definition of a principal residence can qualify as a taxpayer’s principal residence for up to four taxation years where such an election remains in force, even if the property is not ordinarily inhabited during those years by the taxpayer or a member of the taxpayer’s family unit (e.g. the taxpayer’s spouse or common-law partner, former spouse or common-law partner or child). Generally, where a taxpayer has multiple properties which may otherwise qualify as a principal residence, only one housing unit per family unit can be designated as a principal residence for any particular year. The taxpayer must decide which property they choose to designate as their principal residence for each taxation year in which the properties are owned. As such, filing the election in respect of a housing unit does not require a taxpayer to designate that housing unit as their principal residence for any particular taxation year.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period.

The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

We trust these comments will be of assistance to you.

Yours truly,

Sandro D’Angelo, CPA, CMA
Acting Manager
Business Income and Capital Transactions
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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