Beneficial ownership

A REALCO wants to buy a new residential property but builder does not allow corporation to go on title. Due to builder’s condition, corporate directors (husband and wife) need to be on title, whereas, 100% down payment is coming from corporation.

Is their anyway, if corporation and directors/shareholders create a beneficial ownership/trust agreement on side, the property can be recorded in Corporation along mortgage, interest and other expenses, reporting rental income and resultant capital gain on sale is taxed in corporation?

Has any one experienced this in past and did CRA accept this arrangements? I have read and heard lot about beneficial ownership but never experienced myself.

Suggestions?

How can the builder prevent a corporation from going on title? It’s not like the people couldn’t just buy it and transfer title immediately after possession, effectively never really owning it.

Not sure the size of the company, but if it’s small, not a good idea to own residential property in a corporation. If you run a full analysis, depending on situation, of course, but from tax perspective alone, better to own personally

The individuals can make a ‘declaration of trust’ (prepared by the lawyers) stating that they are holding the property in trust for the corporation. I have done this for few of my clients and no problems whatsoever with CRA.

Atul

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Not enough info to understand what is going on.

Is the “builder” selling a new house they have built, and still own? If they are not willing to sell to a corporation, that is weird, but there is no law forcing them to accept any particular offer.

If the buyer and seller have agreed to all conditions and signed the paperwork, the sale is complete, and the buyer can do whatever they want - the seller has no way to prevent the buyer from turning around and selling the property to their own corporation.

Why would you want a “beneficial ownership trust agreement”? I do have a clients who live in a house owned by their corporation. Legal title is in their own name (personal), but the corporation originally paid for the purchase because they did not have sufficient personal funds. They did this many years ago, and the house was recorded as a corporate asset. The corporation has had to report rental income (to avoid a shareholder benefit under ITA 15(1) or whatever), which required a large debit to their shareholder loan every year, which required the issuance of dividends to clear the shareholder loan. So, they have had to pay personal tax on the dividends. Now they are thinking about selling the house, but of course, the corporation will have a capital gain (which is taxable). No personal residence exemption.

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I agree with @atul, as I have done this a number of time with clients in both ways and no issues with CRA.

It is very strange the builder is restricting the ownership of the property to only be individuals and not a corp. I can understand if the original bill of sale had their personal names and now the owners want to assign the property to their corp. This is the first time I have heard this.

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Yes, a Bare Trust agreement could be put in place to accomplish the purchase.

But. A few thoughts:

IMO, this arrangement is fraught with issues…the first of which is that the Bare Trustees will be living in a house purchased by (and paid for by) the corp that beneficially owns the property right from the get-go.

Taxable benefits aside, my first thought would be…are the shareholders, who may also be employees or corporate directors - we have no info on this - and who may, or may not, have other employees - acting qua shareholder, qua director or qua employee (the latter, where a similar option is available to other employees).

I suspect - and without detail it’s hard to opine - that in either of the first two transactions, it would be viewed as abusive and a rather significant reassessment could occur. (They are doing by the back door what they can’t do by the front door.)

Just because they CAN do such a thing doesn’t mean they SHOULD. This would require, at the very least, a pretty thoroughly researched legal opinion taxwise. The intention at the outset is to live there, and to me that is a huge red flag.

And yes, the corp can make a loan to “an employee” to purchase a home - but that has to be offered to all employees of the corp to stay onside, although different conditions can apply by (say) seniority. But if there are no other employees…this is a problem. (I seem to recall either a case or an IT on this somewhere a long time back.)

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Do we have to be concern with tax issue with the trust? Like attribution, maybe it’s a reversionary trust? Income will have to be distribute out in the same year.

Builder being seller can put any conditions. Yes, after closing property it can be transferred/sold to a corporation. Client wants to save land transfer tax, mortgage penalties and potential capital gain.

Atul, have you dealt with CRA in this situation ever? I know, it is doable but want to understand CRA’s take, if soneone has experience.

Guys,

This is an invetsment proerty. Builder can put up any conditions. Transfer/assignmnet after closing is a easy route but that may trigger potential capital gain, mortgage penlties and land transfer tax.

Beneficial ownership is the only solution, I knew, but just wanted to have views, if someone has done this earlier. I spoke with a tax lawyer who supported this and will draft the agreement.

Yes, sir. I have been asked by CRA to prove the ownership; and once the declaration of trust is submitted – everyone is happy.

Atul

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Once more: there is no problem to a Bare Trust agreement - they are used regularly, have frequently been reviewed by Courts and, if properly constructed, found to be acceptable in the given circumstance. I’ve used them with clients in the past in specific circumstances without issue. Each case is fact-specific.

My concern with this proposed transaction is not the BT. It’s the very specific proposed financial nature of the transaction and the potential consequences to same. Personally, I wouldn’t touch it with the proverbial barge pole. YMMV.

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