Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
Case Number: 110027
Attention: XXXXX
March 16, 2009
Subject:
GST/HST INTERPRETATION
GST/HST reporting by nominee corporations
Dear XXXXX:
Thank you for your letter of XXXXX, in which you ask us to comment on the GST/HST reporting criteria of nominee corporations with regard to certain condominium development projects (the "Projects").
All legislative references are the Excise Tax Act ("ETA").
We understand the scenario described in your letter to be as follows:
1. The beneficial ownership of the real property of a particular Project is held by a separate person or jointly by a number of persons, including partnerships and corporations. (Each person holding a beneficial interest in a particular property is collectively referred to in this letter as a "Beneficial Owner").
2. A Beneficial Owner is engaged in single or multiple Projects and may participate with various other arm's length parties in different forms of legal relationship (e.g., co-ownership, joint venture, partnership, etc.).
3. Legal title to the real property of a particular Project is held by a nominee corporation that is an agent of the Beneficial Owners ("Nominee").
4. Under a written agreement between a Nominee and the Beneficial Owner of a particular Project, the Nominee, at the direction of the Beneficial Owner, enters into arrangements to maintain, develop, improve, lease, manage, or sell the Project or any part thereof. The Nominee would further maintain all relevant corporate and accounting records in connection with such activities.
Interpretation Requested
Given that certain Beneficial Owners are potentially involved in multiple Projects through a variety of structures, you wish to know whether the Nominee may report the net tax payable in respect of the various Projects for which it is has been engaged.
Interpretation and Analysis
While we are unable to give definitive comments for numerous transactions involving unidentified parties, we nevertheless provide the following general explanation of reporting requirements under the ETA with reference to the situation you have described.
Bare trust
It is the CRA's position that a person vested with legal title to real property but with no discretionary powers to exercise in respect of the property, is generally considered as a trustee of a bare trust for GST/HST purposes. In such situations, the beneficial owner retains the right to control and direct the trustee in all matters involving the trust. On the other hand, if the trustee is given discretionary authority and decision-making powers in relation to the trust property, the trust is generally considered as an active/true trust as opposed to a bare trust.
It is our view that a particular entity will be considered and treated for GST/HST purposes as an active or bare trust based on fact and principles of law. In the present case, the categorization of the Nominee as an active or bare trust is significant as it dictates who, between the Beneficial Owner and the Nominee, will be required to account for GST/HST under Part IX and thus who will be required to report tax with respect to the Projects.
Where an active trust exists, the trustee would be considered as carrying on the commercial activity related to the trust property, and any supply made by the trustee, as trustee of the trust property, would be considered an activity of the trust. Unless the trust meets one of the exceptions under section 240, it would be required to register and account for tax iFootnote 1.
Conversely, the beneficiaries of a bare trust would generally be considered to be engaged in commercial activities iiFootnote 2 relating to the trust property. The beneficiaries would be viewed as conducting the activities relating to the trust property and would be required to register for GST/HST purposes unless an exception applied, such as the small supplier rule iiiFootnote 3. They would be required to account for the GST/HST to the extent of their share of the trust property, to file GST/HST returns, and generally to comply with the obligations placed upon registrants under the ETA.
Interpretation
Based on your submission, the equitable and beneficial interest in the real property of a particular Project is vested exclusively in the Beneficial Owner with any benefit arising out of a Project presumably accruing thereto. As the Nominee has no apparent discretionary powers or a beneficial interest in any Project property, it would likely be holding legal title to the real property of a particular Project as a bare trustee for the sole benefit of the Beneficial Owner.
With regard to the additional duties performed by the Nominee as described in point 4 above, we note the following passage from GST/HST Technical Information Bulletin B-068 entitled Bare Trusts:
• 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.
Accordingly, even though the Nominee may perform the additional duties described in your letter, it would nevertheless be considered as a bare trustee as long as it is acting strictly upon the instructions of the Beneficial Owner with no discretionary powers of its own. Assuming that the Beneficial Owner is making taxable supplies of Project property in the course of a commercial activity, the Beneficial Owner would be subject to the registration requirements of section 240 and would account for the GST/HST to the extent of its share in the relevant Project(s).
Of course, input tax credits ("ITCs") may be available for GST/HST paid or payable on the inputs to be consumed, used or supplied in the course of commercial activities related to the relevant Projects, pursuant to section 169. In the above-described situations, the person to whose commercial activities the inputs relate will be entitled to claim ITCs.
For example, if it could be determined that the Nominee is a trustee of an active trust, then it would, subject to section 169, claim ITCs for tax paid by the trust in respect of the commercial activities of the trust. On the other hand, if the Nominee is a bare trustee, it would be not be considered as engaged in the commercial activities relating to the trust property and would therefore not be entitled to ITCs on expenses relating to the trust property. The Beneficial Owners would in that case be entitled to claim those ITCs.
We acknowledge that expenses in respect of which a Beneficial Owner may claim an ITC may be incurred by the bare trust acting as their agent or under some type of contractual arrangement. In such cases, the rules of agency, discussed below, may apply where a bare trustee makes supplies on behalf of a Beneficial Owner.
Agency
Where the Beneficial Owner, as the principal, has an obligation to be registered and collect tax in respect of supplies relating to trust property, two treatments are possible. The first one flows from the application of the general rules of Part IX, while the second one results from the joint election of the principal and the agent provided for under subsection 177(1.1) ivFootnote 4.
Subject to any overriding legislative provision, our position is that an agent is merely a conduit for a supply made by a principal. As a result, the principal, as the supplier, is generally responsible for all of the obligations resulting from making the supply vFootnote 5. Accordingly, the principal would have an obligation to collect and remit tax on the supply.
However, subsection 177(1.1) allows the principal and an agent to make a joint election to permit the agent that makes a supply on behalf of a principal to account for the tax collectible on the supply as if the tax were collectible by the agent viFootnote 6. Where the election is made, the agent, and not the principal, would, by virtue of paragraph 177(1.1)(a), be responsible for collecting, reporting and remitting the tax on the supply viiFootnote 7. In that case, the agent and the principal are jointly and severally, or solidarily liable for, among other things, all obligations that arise upon or as a consequence of the tax becoming collectible and any failure to account for or pay the net tax amount that is reasonably attributable to the supply. The election is required to be made in the prescribed form, i.e., on form GST506, Election and Revocation of an Election Between Agent and Principal. The election does not have to be filed with the CRA but is required to be kept in the books and records of the parties.
Importantly, while an election made under subsection 177(1.1) may allow the agent to account for the tax normally accountable by the principal, it does not result in the agent assuming any rights with respect to ITCs to which the principal may be entitled. Consequently, the agent would not be eligible for a net tax deduction in respect of ITCs claimable by the principal.
To summarize, if the Nominee is agent and bare trustee of the Beneficial Owner, it is the Beneficial Owner that would assume the obligations imposed under Part IX in respect of the trust property, including registration, collection and remittance of net tax. However, if the parties make an election under section 177(1.1), the Nominee would account for the tax collectible for supplies of trust property but would be precluded from claiming any ITCs accruing to the Beneficial Owner.
The foregoing comments represent our general views with respect to the subject matter of your request. Those comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me at 613-952-8816.
Yours truly,
Paul Hawtin
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
i 1. Pursuant to subsection 123(1) of the ETA, a trust is a person. Under section 240 of the ETA, every person, including a trust, who is engaged in commercial activity in Canada has an obligation to register for purposes of the GST, unless an exception applies.
ii 2. A "commercial activity" is defined in paragraph 123(1)(c) of the ETA to include the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply.
iii 3. ETA section 148.
iv 4. Since subsection 177(1) does not apply in the case of real property, it is not discussed here.
v 5. If the agent provides a service to the principal (such as acting as an agent in making the supply), the consideration for that supply of a service would also be subject to the general rules of Part IX of the ETA. The agent will charge and account for tax on the commission or service fee charged to the principal for acting as an agent. The principal, in turn, is eligible to claim the ITCs related to the supply made by the agent to the principal. For more information on agency, please see GST/HST Policy Statement P-182R, Agency.
vi 6. Note that where the principal does not have the obligation to collect tax in respect of a supply, the election under subsection 177(1.1) is not available.
vii 7. The supply by the agent of its services to the principal remains subject to the general rules in the same manner as when no election has been made under subsection 177(1.1). The deeming provision that applies upon making this election only affects the tax obligations related to the making of the supply by the principal to the final recipient, and not the supply by the agent to the principal.
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