8 November 1995 GST/HST Interpretation 11750-5-1 - Bare Trust - Deregistration

                                                                        Telephone: (613) 954-8585
Fax: (613) 990-3602
File 11750-5-1(MRB)
ss. 242

This is further to your memorandum dated August 14, 1995 addressed to Sherry Moran, Manager of the Special Projects and Special Cases Unit regarding the bare trust policy. We apologize for the delay in providing you with our response.

You have requested that we provide you with our position concerning the application of the policy where a bare trust is deregistered effective September 30, 1994.

In the interest of providing client service, we would support a decision made by the district office not to assess beneficial owners for amounts of tax that were collected and remitted by a bare trust subsequent to the June 1, 1993 time limitation stipulated in the Department's Technical Information Bulletin B-068 entitled "Bare Trusts" provided that the beneficial owners account for the tax on a prospective basis. Such a decision would effectively extend the grace period provided for in the policy.

It should be noted that even if a bare trust was not required to collect GST, the bare trust is required, under section 225 of the Excise Tax Act, to include amounts collected as or on account of tax in its net tax calculation. Given that the bare trust has collected tax, under the current legislation, both the bare trust and the beneficial owners have a liability to account for the tax and remit net tax. As you may know, the Department has developed a policy to deal with situations where the GST has been collected by a third party instead of the original supplier given that it is not the Department's intention to collect tax twice (P-131). This policy is not applicable where the third party is an agent of the principal.

Where a bare trust has accounted for the GST that should have been accounted for in the net tax calculations of the beneficial owners and remitted net tax, there should be no revenue leakage for the government. Given the existence of the third party remittance policy and the fact that there is no revenue leakage, it would be reasonable to extend tolerance and not assess the beneficial owners. However, the Department should retain the right to assess the beneficial owners for any GST amounts that they were required to remit in circumstances where it is determined that the bare trust has failed to account for any of the amounts that were in fact collectible by the beneficial owners.

Given the limited facts included in your submission, we are unable to determine whether administrative tolerance should be extended in your particular case. For example, we are unable to establish whether XXXXX is in fact a bare trust for GST purposes. As stipulated in the policy, the Department will consider a bare trust to exist where the trustee is merely vested with the legal title to the property and has no other duty to perform, responsibilities to carry out, or powers to exercise as trustee of the trust property. In certain situations, a person who is a trustee may be an agent of the beneficial owners and the trust may still be considered to be a bare trust for GST purposes. For example, the person who is the bare trustee may perform property management functions such as leasing commercial property to tenants specified by and for the account of the beneficial owners.

XXXXX request that the Department confirm that XXXXX and the beneficial owners do not have a GST liability arising from their treatment of the trust property gives rise to the following concerns:

•   XXXXX registered two months after the property was acquired and was deregistered one month prior to the transfer of the property to the beneficial owners. In addition, some of the beneficial owners have deregistered following the conversion of the building into a condominium. It is not clear whether these beneficial owners deregistered after the date that legal title was transferred. Furthermore, it is indicated that as of June 1, 1993 all of the beneficial owners were engaged exclusively in commercial activities and registered for GST. It is not known whether some of the beneficial owners were engaged in exempt activities prior to this date. Given these various dates and circumstances, it is not clear that tax was properly accounted for at the various stages throughout the scenario.

•   It is also indicated that XXXXX has claimed input tax credits for its eligible expenses and that the beneficial owners also claimed input tax credits. Whether input tax credits were claimed twice, once by the trustee and secondly by the beneficial owner, may be an issue requiring further investigation.

•   With respect to the application of section 171 of the ETA, where tolerance is extended, the provisions of section 171 are not applicable when the bare trust deregisters and when the beneficial owners are registered. However, section 171 will apply when the beneficial owners deregister. In the case of capital property, the beneficial owners are deemed to have ceased using the property in commercial activities. As such, the provisions of section 206 of the ETA will apply where the property is capital real property and the beneficial owners may incur a net tax liability.

The following is in response to XXXXX comment that it is difficult to expect businesses who are unsophisticated financially to quickly change their accounting method to accommodate Revenue Canada's administrative policy. It is felt that the Department has provided businesses with sufficient opportunity to comply with the Department's position with respect to the registration of bare trusts. In fact, the policy was first announced to registrants in the June 1992 edition of the Excise News. More detailed information was available in July and businesses were given up to January 1, 1993 to comply with the policy. In addition, a Technical Information Bulletin was published in January 1993 extending the time to comply to June 1, 1993. As such, informed businesses had almost one year to adjust their method of accounting for the GST.

I trust that the above information is satisfactory. If you wish to discuss this matter further please do not hesitate to contact Dave Caron, Manager, Administration and Enforcement Provisions Unit, at 952-0301 or Marcel Boivin at 954-2488.

H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations

(REG)1397

            M. Bloom
D. Caron
S. Moran
M. Boivin
R. Wong