31 March 1993 External T.I. 9233365 F - Bare Trusts

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX 

Dear Sirs:

RE:  Bare Trusts

This is in reply to your letters dated October 29, 1992, January 18 and February 4, 1993, whereby you requested our opinion with respect to the tax consequences of the use of non-resident bare trusts by U.S. citizens, residing in Canada.

As stated in your letters, the particular circumstances outlined therein on which you have asked our views are factual situations involving specific taxpayers. As explained in Information Circular 70- 6R2, 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 a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situations involve completed transactions, you should submit all relevant facts and documentation to the appropriate taxation district office for their views. We are therefore not in a position to give you a definite response as to the application of the provisions of the Income Tax Act (the "Act"). However, we can offer you the following general comments which may be of assistance. Although, in certain circumstances, they may not be appropriate to your specific situations.

The question of whether or not a trust is in the nature of a "bare trust" for Canadian income tax purposes is a question of fact and trust law. The trusts referred to in your letter may be subject to the legislation of different states of the U.S.

Revenue Canada generally provides no opinion as to whether a Grantor Trust, within the meaning of the U.S. law, is a trust (including a bare trust) under either the Act or Canadian common law. You may want to seek legal advice on this issue.

Although a bare trust is not defined in the Act, Revenue Canada generally views this to be a trust under common law where the trustee has no significant powers or responsibilities, and can take no action regarding the property held by the trust without instructions from the settlor. Normally the trustee's only function is to hold legal title to the property. Furthermore, the settlor is also the sole beneficiary and can cause the property to revert to him at any time.

Until 1989, our position was that the trust is to be regarded as the owner of the property for tax purposes, and that the income of the property was to be taxed in the beneficial owner's hands by the operation of subsection 75(2) of the Act, such trusts being reversionary and revocable, and not because we regarded the settlor as the owner. This position was based on the assumption that where the legal title of the property is transferred to a bare trust, subparagraph 54(c)(v) applies. This subparagraph provides that for purposes of the calculation of capital gains and losses, no disposition of property will be considered to have occurred where a property is transferred to a trust and there is a change in the legal ownership without any change in the beneficial ownership. Since subparagraph 54(c)(v) provides only that there is no disposition of the property for capital gains purposes, it was then our view that the property should be regarded as being owned by the trust for all other purposes.

This position was changed in 1989. We are currently of the view that where property is transferred to a bare trust, for all income tax purposes, the settlor will be considered the owner of the property. The history of this position was discussed in greater detail at the Revenue Canada Panel, Corporate Management Tax Conference 1989 (see Conference Report, p. 8:1 to 8:6). This position is under review and your clients would be best advised to seek an advance income tax ruling.

The question of whether the 21-year deemed disposition provisions of subsection 104(4) of the Act apply or not in the case of a totally revokable trust cannot be answered without reference to the trust deed. It generally applies to revokable trusts, but not with respect to property held by bare trusts referred to in the preceding paragraph.

In accordance with our current position, if a U.S. resident transfers a Canadian real property to a bare trust, he will be considered to remain the owner of the property for Canadian income tax purposes. If the trust is resident in the U.S., we express no opinion as to whether or not it will be considered as a trust, including a bare trust, for purposes of the Act and Canadian common law. In the context of an advance income tax ruling request, we would be prepared to rule on the application of subparagraph 54(c)(v), after an adequate review of the relevant documentation.

We express no opinion with respect to the application of subsection 245(2), or any other anti-avoidance provisions of the Act, nor of the provisions of the Canada-U.S. Income Tax Convention in the circumstances.

Yours truly,

for Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch