11 March 1997 External T.I. 9639245 - BARE TRUSTEE CORPORATION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

The partners of a farm partnership are considering establishing a corporation and to transfer all land titles into the name of that corporation. The corporation will also manage the business of the partnership. The beneficial ownership of the land will stay with the partnership. Would the Department treat the corporation as a bare trust and therefore consider that all the income and expenditure related to the farming operation is that of the partnership itself rather than the corporation?

Position:

The Department will, generally, recognize the existence of a corporate "bare trust" where the following conditions are met:

1.A Declaration of Trust has been entered into at the time the property was acquired by the corporation; and

2.As in ATR-1 the corporation should not be empowered to perform any active duties with respect to the property other than those directly related to the business reason(s) that the "bare trust" was considered necessary in the first place.

Reasons:

ccm e50051, it-216, 9230210, 9328697 , em11910

XXXXXXXXXX 5-963924

Attention: XXXXXXXXXX

March 11, 1997

Dear Sirs:

Re: Bare Trustee Corporation

We are replying to your letter of November 19, 1996 addressed to the Regina tax services office wherein you requested the Department's position concerning a corporation acting as a bare trustee for a partnership. We apologize for the delay in our response.

Your request outlines a factual situation involving a specific proposed transaction. As explained in Information Circular 70-6R3, it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. We are therefore not in a position to give you a definite response to your specific fact situation. Nevertheless, we offer the following general comments.

At the 1995 Annual Conference of the Canadian Tax Foundation the Department stated that we generally view a trust under common law to be a bare trust when:

1.the trustee has no significant powers or responsibilities, and can take no action without instructions from the settlor;

2.the trustee's only function is to hold legal title to the property; and

3.the settlor is the sole beneficiary and can cause the property to revert to him or her at any time.

Interpretation Bulletin IT-216 provides the Department's position where a corporation holds property as an agent for its shareholders. This Interpretation Bulletin reads, in part, as follows:

"1. A corporation may hold in trust, as agent for a shareholder, property that was acquired specifically to be held in this way. This situation, however, will only be accepted as a fact where there is an agreement or declaration of trust, entered into before or at the time the property was acquired, between the corporation and the shareholder, which clearly sets out the intention of the parties to the agreement and the degree of participation of the shareholder in the property so held in trust.

2. Where the foregoing is established to be the situation, the corporation will be looked upon as merely an agent for the shareholder who will be considered to be the beneficial owner of the property....

3. In so far as the shareholder is concerned, all the normal consequences of ownership of property will flow from the above arrangement...."

In addition, in the published income tax ruling ATR-1 the Department has recognized the existence of a corporate "bare trust". In essence, the situation was as follows:

1.The company was not empowered to perform any active duties with respect to the property other than those relating to the receipt and disbursement of mortgage funds.

2.A trust document was executed between an individual and the trustee corporation assuring that the company was holding the property as bare trustee for the individual and that beneficial ownership remained and would continue to remain with the individual.

Therefore, it is our opinion that, generally, the Department will recognize that a corporation is acting as a "bare trustee" where the following conditions are met:

1.a trust document exists at the time the property in question was acquired by the corporation and specifying that the corporation is holding the property as "bare trustee"; and

2.as in ATR-1, the corporation should not be empowered to perform any active duties with respect to the property other than those directly related to the business reason(s) that the "bare trust" was considered necessary in the first place.

However, factors such as a significant involvement by the corporation in the carrying on of the active business; a desire by the shareholder to achieve limited liability and representations to third parties that the business belongs to the corporation would all tend to suggest that the situation may be other than that of a corporation acting solely as a bare trustee for a "bare trust". The determination of all of these factors can only be established following a thorough review of all of the relevant facts pertaining to the particular situation. In addition, it is our opinion that a corporation acting as a "bare trustee" should not be recognized where one of the purposes of the purported relationship is to shift income or loss from the corporation to an individual in order to achieve a tax benefit.

Furthermore, concerning the specific situation described in your letter, we are concerned whether or not the partnership continues to exist since the business appears to be performed by the corporation rather than by the partnership. The determination of the existence of a partnership is a legal matter based on common law upon which we will not express any opinion.

As indicated in paragraph 22 of Information Circular 70-6R3 this opinion is not a ruling and accordingly, is not binding on the Department.

Yours truly,

Marc Vanasse
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch