GST/HST Technical Information Bulletin B-068
January 20, 1993
This bulletin does not replace the law found in the Excise Tax Act and its Regulations. It is provided for your reference. As it may not completely address your particular operation, you may wish to refer to the Act or appropriate Regulation or contact any Revenue Canada Excise/GST District office for additional information. If you are located in the province of Quebec, please contact the ministère du Revenu du Québec (MRQ) for additional information.
This bulletin may reflect amendments proposed to the Excise Tax Act contained in Notices of Ways and Means Motion and/or announced in press releases dated December 18, 1990, March 27, 1991, November 5, 1991, February 12, 1992, February 25, 1992, March 10, 1992, April 27, 1992, September 14, 1992, and December 9 and 10, 1992. The federal government announced its intention to introduce certain amendments to the Excise Tax Act to effect these changes which were outlined by the Minister of Finance or the Minister of National Revenue in press releases on the mentioned dates. [Where the information provided in this bulletin reflects proposed amendments, the information is enclosed in square brackets.] At the time of publication, Parliament had not enacted these proposed amendments. Any commentary in this bulletin should not be taken as a statement by the Department that such amendments will in fact be enacted into law in their current form.
Table of Contents
- Bare Trusts
- Agency Relationship vs. Trust Relationship
- Registration for Purposes of the GST
- Commercial Activities
- Liability for Collection and Remittance of GST
- Input Tax Credits
- Transfer of Title to and from the Trustee
- Registration and Deregistration Issues in Relation to the Administrative Position on Bare Trusts
- Becoming or Ceasing to be a Registrant
- Change in Use
This bulletin explains the Department's policy with respect to the treatment of bare trusts and nominee corporations under the Excise Tax Act (hereinafter referred to as the Act) and discusses the different implications of a trust relationship and a bare trust or agency relationship for purposes of registration, collection and remittance of the Goods and Services Tax (GST), and the claiming of input tax credits (ITCs).
NOTE: The information contained in the following pages of this bulletin applies both to bare trusts and in situations where the trustee is a nominee corporation, even though reference in the text is made only to bare trusts.
Due to the differences between common law and civil law, the information contained in this bulletin applies only to bare trusts in common law provinces.
For the purposes of administering the GST, the Department will consider a bare trust (also referred to as a naked trust) to exist where a person (the trustee) is merely vested with the legal title to property and has no other duty to perform, responsibilities to carry out, or powers to exercise as trustee of the trust property. In the Department's view, someone other than the trustee controls the property, and accordingly carries on the commercial activity that relates to the property. The Department views these persons as being the owner of the property for GST purposes. The person or persons with the real ownership of the property may be a "beneficiary", or a "settlor" under trust law. In this bulletin, such a person will be referred to as the "beneficial owner".
The sole duty of a bare trustee will be to convey legal title to the trust property on demand by and according to the instructions of the beneficial owner. This would generally be provided for in the trust document or other documents establishing the trust. The bare trustee will not have any independent power, discretion or responsibility pertaining to the trust property. In such cases, the beneficial owner retains the right to control and direct the trustee in all matters relating to the trust property. Therefore, a trust will not be considered to be a bare trust where the trustee has other duties which involve independent or discretionary powers and responsibilities.
The trustee of a bare trust could be a nominee corporation, which holds bare legal title to property in trust for third parties pursuant to a trust agreement or other documents establishing a trust, and has limited powers, duties and responsibilities as set out above. The third parties could be the shareholders, provided they exercise all of their discretionary powers in respect of the property outside the trustee corporation. For instance, they should provide instructions to the corporation, or the directors, through whom the corporation acts, regarding management of trust property. However, if the directors also are the beneficial owners and if they cause the corporation to perform management functions without clear instructions in writing from the shareholders, the Department will take the view that there is a "true trust" and not an agency relationship.
Agency relationship vs. trust relationship
On the one hand, a trustee may be an agent of the beneficial owner if the trustee is to act strictly on the instructions of the beneficial owner. Thus, if a trustee performs functions in addition to holding bare legal title, but does so strictly on the instructions of the beneficial owners without any discretionary powers and is acting as an agent, the trust may still be a bare trust. For example, the bare trustee may perform property management functions such as leasing commercial property to tenants specified by and for the account of the beneficial owner.
On the other hand, where a person acts under a duty to manage and/or dispose of the trust property, and the person has independent or discretionary power or responsibility to do so, the Department considers this person to be acting as a trustee of the trust and not as an agent of the beneficial owner.
In a trust which is called a bare trust, it is necessary to examine the nature of the duties contemplated by the trust to determine whether the principles of agency rather than the principles of trust apply. In making such a determination, the Department will normally look to the provisions contained in the trust document or other documents establishing the trust. Where no documents exist, but property is nevertheless held in trust, the Department will generally take the view that the principles of trust rather than agency apply. However, it will consider surrounding circumstances (e.g., contracts for both acquiring and providing goods and services) to determine whether they establish that the trust is a bare trust rather than a "true trust". Once it is determined whether the principles of trust or agency apply, this, in turn, will determine whether the trust will be considered by the Department to be a bare trust, and consequently who, between the beneficial owner and the trustee, will be required to register for purposes of the GST. The registrant will be liable to account for GST on taxable supplies relating to the property held in trust.
Nevertheless, the Department considers that a trust and agency relationship may co-exist in certain situations. Consequently, some duties of the trustee may be performed as trustee, others as agent. Thus, in certain circumstances, the trustee or agent may also be a registrant. This is discussed in more detail below.
Registration for purposes of the gst
While a trust is not normally considered a legal entity, the Act does include a trust in the definition of "person" for purposes of the GST.
Pursuant to subsection 240(1) of the Act, every person, including a trust, who makes a taxable supply in the course of commercial activities in Canada has the obligation to be registered for the purposes of the GST except:
(a) a person who is a small supplier;
(b) a person whose only commercial activity is making supplies of real property by way of sale otherwise than in the course of a business; and
(c) a non-resident person who does not carry on any business in Canada.
To determine whether a trust is required to register for purposes of the GST, it is necessary to ask who, between the trust and the beneficial owner, is engaged in commercial activities in respect of the property placed in the trust, assuming the property is not used in exempt activities. The person who makes the supplies, if any, related to the trust property will be the person the Department considers to be engaged in commercial activities.
Where a trust is viewed by the Department as a bare trust, all powers and responsibilities to manage and/or dispose of the trust property would be reserved to the beneficial owner. As a result, the beneficial owner, rather than the bare trust, would be involved in commercial activities relating to the trust property. Unless the beneficial owner qualifies for small supplier status pursuant to section 148 of the Act, or under one of the exceptions listed in subsection 240(1) of the Act, registration for purposes of the GST would be required. Where there is more than one beneficial owner within the trust arrangement, the small supplier's threshold will be calculated on an individual basis, each beneficial owner being a separate person under the Act, unless the beneficial owners are associated persons for purposes of the Act.
On the other hand, if independent decision-making powers and responsibilities relating to the management and administration of the trust property are given to the trust, the trust will be considered to be engaged in commercial activities in respect of the supplies related to the trust property. In this case, a supply made by the trustee as trustee of the trust property will be an activity of the trust. Decision-making, administrative, and managerial responsibilities relating to the trust property could include the authority to contract by way of lease, sale, acquisition, investment, etc. The trust would be required to register for purposes of the GST unless it met one of the exceptions listed in subsection 240(1) of the Act.
Trustee's Commercial Activities
In addition, the trustee may be engaged in commercial activities, which, in the Department's view, it would be carrying on in its own name. For instance, the trustee may earn trustee fees, or fees for operating the trust property as agent for the beneficial owners. The trustee would have to register for GST purposes in light of such activities, unless it met one of the exceptions from registration in subsection 240(1) of the Act.
Liability for collection and remittance of GST
Where a trust is required to register under the Act, the trust will be accountable for the GST with respect to the commercial activities carried on with the property.
On the other hand, in a bare trust situation, since the beneficial owners are considered to be engaged in the commercial activities relating to the trust property, they would be required to account for the GST to the extent of their share of the trust property, to file GST returns, and generally to comply with the obligations placed on registrants under the Act.
Nevertheless, a bare trustee may also perform various duties as agent of the beneficial owners, or under some type of contractual arrangement with the beneficial owners.
The requirements in section 177 of the Act should be addressed since the provision may apply where a bare trustee makes supplies on behalf of the beneficial owners. Pursuant to this provision, where a transaction is made by the trustee as an undisclosed agent, the beneficial owner, as principal, will be liable for the collection and remittance of the GST on a deemed supply to the agent. Where there is more than one beneficial owner, each would account for the GST on the supply to the extent of its share of the trust property. The agent will be liable for collection and remittance of the GST on the deemed supply to a third party.
In the case of a bare trust with several beneficial owners, it may be possible for them to elect one of the beneficial owners to be responsible for accounting for the GST in respect of the trust property under the joint venture election pursuant to section 273 of the Act.
Input tax credits
Pursuant to section 169 of the Act, a registrant is entitled to claim ITCs for GST paid or payable on the inputs to be consumed, used or supplied in the course of commercial activities.
In a trust situation, the person to whose commercial activities the inputs relate will be entitled to claim ITCs. For example, a "true" trust would be the one to claim ITCs where GST has been paid by the trust in respect of the commercial activities of the trust.
On the other hand, the Department considers that a bare trust is not engaged in commercial activities and is not entitled to claim ITCs. Instead, the beneficial owners are entitled to claim ITCs for the GST on expenses relating to their commercial activities. These expenses may be incurred by the bare trust acting as their agent.
Transfer of title to and from the trustee
Sections 268 and 269 of the Act provide that, where a person settles property on an inter vivos trust and where the trustee distributes property of the trust to the beneficiaries, the settling or distribution of the property is deemed to be a supply for consideration equal to the amount determined under the Income Tax Act to be proceeds of the disposition of the property.
These legislative provisions generally apply to all trusts and make the transfer of the title to the trust a taxable supply for purposes of the GST unless one of the exempting provisions applies, or the supplies would otherwise not be subject to the GST. Similarly, when title to the trust property is transferred to the beneficial owner, there may be a taxable supply.
Paragraph 54 (c)(v) of the Income Tax Act states that the transfer of legal ownership of the property held in trust without any change in the beneficial ownership is not a disposition of property. This provision will apply to a bare trust situation.
However, sections 268 and 269 of the Act provide that, for GST purposes, there will be a supply when any property, including the legal estate, is settled with a trustee or distributed to the beneficial owners, even if this is not a disposition for income tax purposes. Nevertheless, legal title without the equitable interest would normally have little or no monetary value. The settling of the legal title in a bare trust and the transfer of the title to the beneficial owner would normally have no GST implications.
Registration and deregistration issues in relation to the administrative position on bare trusts
In a bare trust situation, the beneficial owner will be required to register and to account for GST in respect of supplies relating to the property held in a bare trust and will have until June 1, 1993, to do so. Registration will not be retroactive.
For periods prior to June 1, 1993, where a bare trust was incorrectly registered, and was accounting for GST, as long as the bare trust otherwise met the requirements in the Act with respect to remitting applicable net tax, no interest or penalties will be imposed on the beneficial owners for not remitting the GST. On the other hand, where beneficial owners of property held in a bare trust have registered and accounted for the GST since the inception of the trust or January 1, 1991, they will also be considered to be in compliance with the Act. A bare trust that is currently registered and accounting for GST in respect of supplies relating to the property held in a bare trust, may apply for cancellation of the registration. Such a cancellation would be effective on the same day that the beneficial owner is registered.
The Minister of National Revenue has, pursuant to subsection 242(1) of the Act, discretion to cancel a registration.
Becoming or ceasing to be a registrant
The provisions on becoming and ceasing to be a registrant will not apply when the beneficial owner registers and the bare trust deregisters. The Department is simply changing its policy so that, effective January 1, 1991, there is a change in who is considered to hold trust property and be engaged in a commercial activity in respect of the trust property, and therefore a change in who is required to be registered for purposes of the Act.
Accordingly, the change in policy will not trigger the rules applicable to registration and cessation of registration, as set out in section 171 of the Act.
Change in use
The registration/deregistration will not generally affect the use of the property held in a bare trust.
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