7 March 1991 Income Tax Severed Letter - Bare Trust

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.

Dear Sirs:

Re: Bare Trust

We are writing in reply to your letter of January 31, 1991, in which you ask several questions concerning income earned by a corporation ("Bandco") and by a partnership of two corporations ("Bandco" and "Taxco") where the shares in Bandco are all held by an Indian Band (the "Band"). You asked us to indicate, when responding, the extent to which our position in Interpretation Bulletin IT-216 ("Corporation Holding Property as Agent for Shareholder") has been confirmed or modified by our study of the bare trust concept. ["Bare trust" for purposes of this discussion means 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. Furthermore, the settlor can cause the property to revert to him at any time.]

The Department has not modified its position as described in the aforementioned Interpretation Bulletin and we confirm that, where property is transferred to a corporation as an agent for the shareholder, the latter will be considered the owner of the property for income tax purposes even if a trust is settled. We have not included our study, however, and it is possible that our interpretation and administration of the law will change in future with respect to these bare trust or agency relationships. With respect to your specific questions our comments follow:

The issue of whether a trust has been established is a matter of fact and therefore we are unable to confirm whether the two scenarios you describe constitute an agency relationship or bare trust so as to meet the conditions in Interpretation Bulletin IT-216. We wish to point out however, that an Indian Band is not a person for purposes of the Income Tax Act since it is not a legal entity. Therefore, any trust or agency relationship must be established with individual band members (such as the chief or members of the band council) if the exemption under section 81 of the Income Tax Act is to apply.

Your first scenario involves Banco leasing land which the Band has designated to the Crown pursuant to the Indian Act. Banco shares are held by the Band and Bandco has entered into a declaration of trust by which it holds all assets and receives income for the benefit of the Band. The Band has full authority to direct the activities of Bandco and elects all its directors. Bandco sublets the land and receives rent at fair market value.

Subject to our previous comments that the Band itself is not the proper party for tax purposes, we agree that if Bandco is a bare trustee or agent for Indians then the rent would be considered income of the Indians and would be exempt from income tax, and Interpretation Bulletin IT-216 would apply.

In your second scenario Bandco and Taxco (a taxable corporation) create a partnership, lease the designated land from the Crown and build and subsequently operate a recreational facility thereon.

Again, we agree that business income earned by Bandco will be considered the income of the Indians if an agency relationship or bare trust between Bandco and the Indians exists. Such income will be exempt from income tax and the aforementioned Interpretation Bulletin will apply.

The foregoing comments constitute an opinion only and are not binding on the Department. We trust, however, that they are of assistance.