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Bare Trusts Are Not Always A Non-Entity For ETA Purposes

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A New Housing Rebate (“NHR”) is available under ss. 254(2) of the Excise Tax Act (“ETA”) to enable those who qualify to obtain a rebate of GST/HST paid on the purchase of a new residential property. To qualify para. 254(2)(b) says a “particular individual” must acquire a property for use as a primary place of residence of that individual or a family member.

In Cheema v. The Queen, 2016 TCC 251, the Tax Court of Canada (“TCC”) held that based on the general principle that a bare trust is considered a non-entity for tax purposes, a guarantor that signs an agreement of purchase and sale as a bare trustee for the beneficial owners was not a “particular individual”.

The TCC decision was recently overturned by the Federal Court of Appeal (“FCA”) in Cheema v. The Queen, 2018 FCA 45 (“Cheema”) where a 2-1 majority held that a bare trustee was a “particular individual”.

 The Appellant in Cheema purchased a new residential property where he intended to live with his wife. To assist with financing a friend co-signed the agreement of purchase and sale with the understanding that he would have no real interest in the property. When the Appellant later applied for a NHR, the CRA denied it on the basis that the friend, who never intended to reside at the property was a “particular individual”.

On appeal, the TCC judge adopted the principle that a bare trust a non-entity for tax purposes since the beneficial owner is treated as a principal dealing with the property through a bare trustee acting as its agent. On this basis, the TCC held that the term “particular individual” in ss. 254(2) of the ETA only applied to beneficial owners, so the friend, as a bare trustee, was not required to have an intention to occupy the property.

On further appeal to the FCA, the TCC’s finding of a bare trust was not challenged, but the CRA did challenge the ultimate conclusion in the case.

The FCA majority noted that s. 40 of New Harmonized Value-added Tax System Regulations, No. 2, SOR/2010-151 (the “Regulations”) provides that if a supply of a new property is made to two or more individuals, the references to “a particular individual” are to be read as references to all of those individuals as a group. When s. 40 of the Regulations was read together with ss. 254(2), the majority found that it was clear that pursuant to para. 254(2)(b) all purchasers of a new property must have the intention to use the property as a primary residence.

The majority held that the existence of a bare trust was irrelevant based on the wording of para. 254(2)(b) which looks at the reason that a “particular individual” is acquiring a property at the time that person “becomes liable or assumes liability under an agreement of purchase and sale of the complex.”

The FCA therefore allowed the appeal and concluded that the bare trustee was a “particular individual” under para. 254(2)(b).

The FCA decision in Cheema is a clear departure from the general principle that a bare trust will be disregarded for tax purposes. In support of its decision, the majority held that the bare trust was irrelevant based on the wording of para. 254(2)(b) which looks at the reason that a “particular individual” is acquiring a property. However, this argument assumes that a bare trustee is a “particular individual”, which would not be the case under the general principle that a bare trustee is a non-entity to be disregarded for tax purposes.

The FCA majority decision also seems to be contrary to the purposes of the NHR which is to reduce the burden of purchasing a new residential property, which presumably means that the intended recipient of this rebate is the beneficial owner(s) of the property. On this basis, we tend to agree with the dissenting FCA judge who found that for this reason there was “…no apparent reason to depart from the general principle that bare trusts will be ignored for the purposes of the ETA.”

Leave to appeal to the Supreme Court of Canada (“SCC”) has been sought. Hopefully the SCC decides to hear this appeal. As it stands, this decision has the potential to create much uncertainty when it comes to how the GST/HST operates in the context of (what would have been historically considered look-through like) agents and bare trustees.

A version of this article appeared in the April 2018 issue of the Canadian Tax Foundation’s Canadian Tax Highlights.

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