31 March 2000 GST/HST Interpretation 8327/HQR0001933 - Bare Trusts

We are replying to a memorandum from XXXXX XXXXX XXXXX requested advice on (1) whether a bare trust existed between XXXXX XXXXX and (2) whether the XXXXX would be eligible to claim ITCs with respect to the rental of equipment to the Dentist.

Background

•   The XXXXX is registered for GST/HST purposes and provides dental health care services for its own account. Furthermore, the XXXXX provides, as the agent of the Dentist, Payment Services and other specified services described in XXXXX[.] The shareholders of the XXXXX are: the Dentist who owns XXXXX of the shares and the XXXXX who owns the remaining XXXXX of the shares.

•   The XXXXX claimed ITCs on the equipment that was used exclusively by the Dentist to supply exempt services. Audit issued a proposal denying the ITCs related to the acquisition of the equipment on the basis that there was a bare trust relationship between the XXXXX and the Dentist and, as a result, the XXXXX, as bare trustee, was merely holding legal title to the equipment.

•   In support of its position, XXXXX which states, in part, that the party who is the registered title holder of the particular item of

Property shall be deemed to hold the item of Property in trust for the beneficial owner of the Property as a bare trustee only. Property essentially includes, under XXXXX, interest under any lease and interest in the equipment owned or leased by the XXXXX, the Dentist or both. XXXXX XXXXX which states, in part, that except for the agency services of the XXXXX, neither party provides any services to the other with respect to the Property.

•   In response to XXXXX the client's legal representative took the position that XXXXX is intended to be a general purpose provision and that the bare trust arrangement is intended only to apply in circumstances where the registered owner is not also the beneficial owner of the property. The representative also advised that in the circumstances under consideration, the XXXXX is both the legal owner and the beneficial owner of the equipment. Therefore, XXXXX would not apply as this provision would be relevant only if the XXXXX was not the beneficial owner of the equipment. In support of his position the client's representative referred to the fact that the equipment had been recorded as assets on the balance sheet of the XXXXX and, as a result, the XXXXX would be entitled to claim full ITCs.

•   In addition, the client's accountant took the position that, under the Agreement, there is an agency fee charged by the XXXXX to the Dentist to pay his share of Property Expense, Periodic Cost and Consumable and Miscellaneous Expense. The accountant also advised that they have determined which capital property is used strictly by the Dentist and relates to the taxable agency fee (for more details, see list of equipment on pages 2 and 3 of accountant's letter dated December 21, 1998). Furthermore, the accountant submitted that since the XXXXX purchased the equipment for use in the course of its commercial activities (i.e., rental of equipment), the XXXXX was entitled to claim full ITCs on the purchase of the equipment.

Comments

1) Bare Trust

In general, a bare trust is a trust where the trustee (or trustees) holds property without any further duty to perform except to convey the property to the beneficiary or beneficiaries upon demand.

For GST/HST purposes, TIB B-068, Bare Trusts, states in part at page 1 that:

"... the Department will consider a bare trust (also referred to as a naked trust) to exist where a person (the trustee) is merely vested with the legal title to property and has no other duty to perform, responsibilities to carry out, or powers to exercise as trustee of the trust property. In the Department's views, someone other than the trustee controls the property, and accordingly carries on the commercial activity that relates to the property."

In order to determine whether a trust or bare trust exists, we must examine what constitutes a trust. Generally, a trust is constituted by a document called a trust instrument which vests the trust property in the trustee and describes the rights and obligations of the parties to the trust. A trust cannot be established unless the following three certainties are present.

•   Certainty of Intention: the language of the settlor must be imperative. Specifically, it must be clear that the settlor intends, under the agreement, to create a trust relationship, i.e., that a particular property should be held in trust.

•   Certainty of Subject-Matter: it must also be possible to identify clearly the property which is to be subject to the trust (described in the trust instrument). Furthermore, even if the trust property is clearly defined, the interest in that property which the beneficiaries are each to take must also be clearly defined. In addition, a bare trust relationship cannot be created with future property that is property that may exist but only some time in the future.

•   Certainty of Objects or Beneficiaries: the description of the beneficiaries in a trust (other than a charitable trust) must be sufficiently clear and precise to allow the trustees to determine whether any particular person is or is not intended to be a beneficiary.

XXXXX states in part that:

"The Parties agree, that, from time to time, the title to any particular item of Property may be taken or held in the name of the Party who is not the beneficial owner thereof. In such circumstances, the party who is registered as the title holder of the particular item of Property shall be deemed to hold the item in trust, as a bare trustee only, for the Party who is the beneficial owner of the item of Property. As well, for convenience the Parties may, from time to time, cause one or more items of Property that is beneficially owned by both Parties to be registered or otherwise held in the name of one of the Parties or both Parties."

In brief, XXXXX implies that where certain conditions are met, (i.e., the registered owner of the Property is not also the beneficial owner) then and only then, the registered owner of the Property is deemed to hold the Property in trust as bare trustee only. Put differently, until such circumstances exist, there is only a possibility that a bare trust relationship may be created.

Based on the information provided by the representative, it appears that the XXXXX is both the registered owner and the beneficial owner of the equipment. No information has been provided to support the position that the XXXXX is not the beneficial owner of the equipment and that a bare trust relationship exists with respect to the equipment. Note that whether the XXXXX is both registered as the titleholder of the equipment and the beneficial owner of the equipment is a question of fact. Accordingly, these facts should be verified by XXXXX XXXXX.

2) Agency Fees/Rental of XXXXX ITC Entitlement

As it does not appear that a bare trust relationship exists between the XXXXX and the Dentist with respect to the equipment, we must now examine the nature of the supplies under the Agreement.

The client's accountant submits that they have determined which property is used strictly by the Dentist and relates to the taxable agency fees. The client's accountant concluded that since the XXXXX purchased that property in the course of commercial activities, i.e., rental of equipment, the XXXXX would be entitled to claim a full ITC on the purchase of the equipment. XXXXX XXXXX agency services, the Dentist pays annual fees to the XXXXX "as the parties may determine". The issue that now arises is whether the agency fees paid by the Dentist under the Agreement include consideration for the supply of the equipment by way of lease (rental of equipment) or only represent consideration for the supply of certain services provided by the XXXXX.

Although the terms "agency services" are not defined in the Agreement, XXXXX XXXXX describes the specified services provided by the XXXXX (i.e., the payment of the Dentist's share of all consumable and miscellaneous expense, periodic cost and property expense, as the agent of the Dentist). However, there is no provision in the Agreement that provides for the rental of equipment to the Dentist. Therefore, the agency fees paid by the Dentist under the Agreement would not include any amount for the rental of equipment that was used exclusively by the Dentist.

Although no lease agreement was provided, based on the information provided, the Dentist had exclusive use of the equipment owned by the XXXXX. Therefore, it appears that the XXXXX has made a supply of equipment by way of lease, licence or similar arrangement to the Dentist for GST/HST purposes and that this supply was made for no consideration. If this is in fact the case, subsection 155(1) of the Act would apply to the supply of equipment by way of lease, license or similar arrangement made by the XXXXX to the Dentist. As a result, the value of the consideration for the supply will be deemed to be equal to the FMV of the rental of equipment. This conclusion is based on the fact that the XXXXX and the Dentist, who is not registered for GST/HST purposes, are related under subsection 126(2) of the Act and, as a result, would not be dealing with each other at arm's length under subsection 126(1). Therefore, the XXXXX would be liable under subsection 221(1) to collect tax on the deemed value of the consideration for the rental of the equipment. However, if a separate agreement exists related to the rental of the equipment, it would be necessary to determine whether the consideration under that agreement is equal to the FMV of the supply.

Section 155 may also apply to other supplies made by the XXXXX to the Dentist. As a result, XXXXX may want to verify whether the agency fees paid to the XXXXX XXXXX) for the specified services represent consideration that is less than the FMV of the services.

In respect of the eligibility of the XXXXX to claim ITCs related to the purchase of the equipment, the XXXXX may be entitled to claim ITCs under subsections 169(1) and 141.01(2) to the extent the equipment was acquired for use in the course of its commercial activities. For example, if the XXXXX acquired the equipment exclusively for the purpose of making taxable supplies for consideration in the course of its business, i.e., rental of equipment, then the XXXXX would be entitled to claim full ITCs provided the other conditions in section 169 are met. Note that if the supply of the equipment was made for no consideration to the Dentist, the supply would have been deemed to be made for consideration equal to the FMV of the equipment under subsection 155(1).

Should you have any questions or require clarification on these issues, please call me at (613) 954-4394[.]

J.E. Allard
Specialty Tax Unit
Financial Institutions and Real Property Division

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