In a recently released November 20, 2023 Technical Interpretation, CRA considered whether a resident participating in a housing agreement involving regular payments towards a future option to buy a property held beneficial ownership or a leasehold interest for purposes of the principal residence exemption (PRE).
The agreement allowed the taxpayer to occupy the unit and make monthly payments, some of which increased their investment (the “interest”) in the property. The resident would eventually be able to purchase the property at fair market value and apply the accumulated interest as a down payment. The interpretation addressed whether a gain on repayment of this interest could be sheltered by the PRE.
Beneficial ownership
CRA noted that beneficial ownership is a common law concept based on rights such as possession, control and the ability to transfer title, as well as bearing obligations such as paying property taxes. While the taxpayer had exclusive possession and bore some financial risk, CRA found that the taxpayer lacked critical elements of ownership, such as control over mortgaging, the right to rent or make structural changes without approval and ultimate responsibility for property expenses. Thus, CRA concluded that the taxpayer did not have beneficial ownership and therefore did not “own” the property for purposes of the PRE.
Leasehold interest
Gains on dispositions of leasehold interests can be eligible for the PRE. CRA acknowledged that a lease likely existed but clarified that the amount paid to the taxpayer upon termination of the agreement was not to compensate for lease termination, but rather was tied to the taxpayer’s accrued interest. As such, any gain on the repayment of this interest would not be eligible for the PRE, as it would not be a disposition of a qualifying property.
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