We know that if a property qualifies as a principal residence, an exemption can be claimed to reduce or eliminate any capital gain otherwise realized on the disposition of the property. Under the Income Tax Act, 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 (title and right to enforce ownership) and beneficial (use and benefit irrespective of title).

A couple of blog years ago, I wrote about the role of beneficial ownership in determination of the principal residence exemption claim. The Canada Revenue Agency (“CRA”) was asked to comment on a scenario where your parents transferred legal title to you for health reasons but continued to reside in the house and pay all the household expenses. Then they passed away. Based on the CRA commentary, It appeared to me that since your parents continued to have beneficial ownership of the house until they passed away, the principal residence exemption could be claimed by the estate on the deemed disposition of the property at time of death.

Recently, the CRA was asked to comment on the same issue in regard to a different fact scenario and in the process confirmed more affirmatively that under the right circumstances, beneficial ownership can “trump” transfer of title.

Assume Mr. and Mrs. Leverage purchased a property as their principal residence. Due to financial difficulties, the Leverages could no longer qualify to refinance the original mortgage when it came due 3 years later. As such, the legal title of the property was transferred to Mr. Leverage’s parents in and the mortgage was renewed in Mr. Leverage’s parents’ name.

However, the Leverages continued to make all the mortgage payments; paid all other costs related to the property; and continuously lived in the property. Beneficial ownership of the property remained with the Leverages. Then Mr. Leverage’s dad passes away unexpectedly a few years later and Mr. Leverage’s mum wants to transfer the title of the house back to Mr. Leverage because she does not want the burden of it. Fortunately, the Leverage’s financial situation had since improved and they accepted transfer legal title of the property back into their names.

The CRA was asked if the transfer of legal title will trigger any income tax consequences for the Leverages or their parents.

In their interpretation of this fact scenario, the CRA concluded that it appeared that the Leverages likely remained as the beneficial owners of the property. If that was the case, then the transfer of legal title of the property back to the Leverages would not, in and of itself, result in any income tax consequences. However, the CRA did recommend that independent legal advice be obtained as to whether there are any other implications, such as land transfer taxes.

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