Principal Issues: Does the principal residence capital gains exemption apply when title on a property is not in the taxpayer's name at the time of death.
Position: Yes, if the taxpayer is the beneficial owner.
Reasons: Definition of "disposition" in 248(1) does not include a disposition if there is no change in beneficial ownership. Since there was no change in beneficial ownership when the title was transferred there was no disposition at the time. Taxpayer is deemed to dispose of property at time of death.
XXXXXXXXXX 2010-038904 A. Townsend March 10, 2011
Dear XXXXXXXXXX :
Re : Principal Residence of a deceased taxpayer
I am writing in response to your fax of November 30, 2010, asking for our comments on whether the principal residence capital gains exemption applies when title on a property is not in the taxpayer's name at the time of death. In the situation you have described, the taxpayer had occupied the home since XXXXXXXXXX as his principal residence until his death in XXXXXXXXXX . In XXXXXXXXXX title on the property was transferred into the names of his adult children in order to avoid a possible claim against the property by the taxpayer's live-in companion. After the taxpayer's death in XXXXXXXXXX , the home was sold and proceeds were divided equally among his children. You are of the opinion that the taxpayer was the beneficial owner of the property at the time of his death. Accordingly, any capital gain that accrued on the property at that time is not subject to tax as it qualifies for the principal residence exemption.
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 (TSO) 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").
Generally, a capital gain on the disposition of a "principal residence", as defined under section 54, is calculated under paragraph 40(2)(b) and not subject to tax. A "disposition" is defined in subsection 248(1). Paragraph (e) of this definition provides that a disposition does not include any transfer of property as a consequence of which there is no change in the beneficial ownership of the property.
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. In addition, a person's legal ownership of a property may be subject to another person's beneficial ownership of that same property.
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. If the beneficial ownership of the property did not change when title of the property was transferred to the taxpayer's children in XXXXXXXXXX , we are of the view that there would be no disposition of the property under the Act at that time. In this situation, provided the property was the taxpayer's principal residence, any capital gain on the deemed disposition on death would be calculated in accordance with paragraph 40(2)(b).
We trust these comments are helpful.
Yours truly,
Guy Goulet CA, M.Fisc.
Manager
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch