Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST Policy Statement P-015

Date of Issue

July 20, 1992

Subject

Treatment of Bare Trusts under the Excise Tax Act

Legislative Reference(s)

Sections 169, 177, 240, 268, 269 and 273 of the Excise Tax Act and Subsection 242(1) of the Excise Tax Act.

National Coding System File Number(s)

N/A

Effective Date

January 1, 1991

Text

Administrative Definitions

The following administrative definitions will apply for purposes of administration and interpretation of policies in relation to bare trusts.

bare trust

means a trust where the trustee has legal ownership of the property but has no other duties, obligations and responsibilities with respect to the property as trustee other than to transfer, under the absolute control and instructions of the beneficiary, the title to the property.

beneficiary / beneficial owner

is a term applied most commonly to cestui que trust, the person who has enjoyment of the property held in trust, but not legal title, which remains in the trustee or personal representative. (Black's Law Dictionary)

settlor

means one who furnishes the consideration for the creation of a trust, though in form the trust is created by another. (Black's Law Dictionary)

trustee

means one who holds legal title to property in trust for the benefit of another person (the beneficiary). (Black's Law Dictionary)

Policy

Introduction

Ownership could be described as a right to the title, possession, use and enjoyment of property. Ownership rights may be divided between the legal estate and the equitable estate.

The legal estate refers to legal title and title rights. The equitable estate refers to the rights of a person to have legal title transferred to him or her, or the beneficial interest of one person to property the legal title to which is vested in another person. A person may own both the legal estate and the equitable estate. However, it is possible for the legal estate to be separated from the equitable estate.

There could therefore be two owners in respect of the same property, the legal or nominal owner, and the beneficial or equitable owner.

The existence of a trust is generally evidenced in a trust document which sets out the instructions of the settlor for carrying out the terms of the trust and specifies the obligations and responsibilities of the trustee.

Bare Trusts

A bare trust, also referred to as a naked trust, exists where a person, the trustee, is merely vested with the legal title to property and has no other duty to perform or responsibilities to carry out as trustee, in relation to the property vested in the trust.

The sole duty of a bare trustee would be to convey legal title to the trust property on demand of and according to the instructions of the beneficiary as provided for within the trust instrument. The bare trustee does not have any independent power, discretion or responsibility pertaining to the trust property. In such cases, the beneficial owner retains the right to control and direct the trustee in all matters relating to the trust property.

Therefore, a trust will not be considered to be a bare trust where the trustee has other duties set out in the trust instrument which involve independent or discretionary powers and responsibilities.

The trustee in a bare trust situation may be a nominee corporation.

Agency Relationship Vs Trust Relationship

There has been much debate over the years as to the actual role of a trustee, perhaps more so in respect of the bare trust. There is still no unanimity today within the legal community on the nature of the relationship between the trustee and the beneficial owner.

In a bare trust situation, upon separation of the legal estate from the equitable estate, the trustee is viewed by many as an agent of the settlor. This view is based on the premise that the trustee acts strictly on the settlor's instructions.

On the other hand, where a person acts under a duty to manage and/or dispose of the trust property and the person has independent or discretionary power or responsibility to do so, such a person will be considered to be acting as a trustee of the trust and not as an agent of the beneficiary.

While the trustee's duties may generally point to a predominant agency relation in a bare trust situation, it is necessary to look at the nature of the duties contemplated by the trust to determine whether the principles of agency rather than the principles of trust are applicable.

The existence of a trust or agency relationship is therefore a mixed question of fact and law that should be determined on a case by case basis by examining the trust agreement or declaration.

Bare Trusts under the Excise Tax Act

The characterization of the relationship which predominates the trust becomes of significant importance in determining who, between the beneficial owner and the trustee, will be required to register for purposes of Part IX of the Excise Tax Act (the "Act") and hence who will be liable to account for GST on supplies relating to the property held in trust.

Registration

While a trust is not normally viewed as being an entity, the Act does define the term "person" to include a trust. The trust which is created when the settlor gives legal title to another person will thus be considered a person for purposes of the GST.

Pursuant to section 240 of the Act, every person who is engaged in a commercial activity in Canada has the obligation to be registered for purposes of the GST, with the exception of a small supplier, a non-resident person not carrying on business in Canada, or a person whose only activity is making supplies of real property by way of sale otherwise than in the course of a business.

Carrying out Commercial Activities

Therefore, where a trust is created, it is necessary to ask who, between the trustee and the beneficial owner, is engaged in a commercial activity in respect of the property (assuming the property is not used in exempt activities). The person who makes the supplies, if any, related to the property will be the person who is considered to be engaged in commercial activity.

As mentioned earlier, in a bare trust, the trustee only holds legal title and will convey such title on demand in accordance with specific instructions of the beneficial owner. The bare trustee would not be seen as carrying on any commercial activity with respect to the trust property, and thus the trust would not be required to register under the Act.

In this situation, all powers and responsibilities to manage and/or dispose of the property would likely be reserved to the beneficial owner in the trust document. As a result, the latter, rather than the bare trust or trustee, would be involved in commercial activities relating to the property. Unless the beneficial owner qualifies for small supplier status, or one of the exceptions as indicated above, registration pursuant to the Act would be required. Where there is more than one beneficiary of the trust, the small supplier's threshold will be calculated on an individual basis, each one being a person under the Act, unless the beneficiaries are associated persons for purposes of the Act.

On the other hand, if independent powers and responsibilities in relation to the management of the property are given to the trustee in the trust instrument, the trustee will be considered to be carrying on a commercial activity in respect of the supplies related to the property. Again, this would be determined on the basis of the trust document. In this case, a supply made by the trustee, as trustee, in respect of the trust property, will be an activity of the trust and the accounting for GST would be done by the trustee for the trust. Decision-making, administrative and managerial duties in relation to the property could include the authority to contract by way of lease, sale, acquisition, investment, etc. The trust would be required to register under the Act, unless it met one of the exceptions in section 240, set out above.

As indicated earlier, there may be circumstances where the trustee will be acting in more than one capacity e.g. as trustee in respect of some activities, and as agent in respect of other activities. In such instances, the reporting must be done according to the trustee's role as agent or as trustee, as applicable.

The bare trustee would have to register in its own capacity as trustee or agent where the trustee's revenue from its commercial activities (and those of associated persons), rather than the trust's activities, exceeds the small supplier threshold. For example, the trustee may earn trustee fees, or fees for operating the trust property as agent for the beneficiaries.

Liability for the Collection and Remittance of GST

In the situation where the trust instrument provides for discretionary and decision-making responsibilities as being part of the trustee's duties, the trust will not be treated as a bare trust. As a person under the Act, the trust will be accountable for the GST with respect to the trust's commercial activities.

Where the bare trustee discharges duties in addition to those set out in the trust instrument, such duties will be regarded as being performed pursuant to a contract of agency or some other type of contractual arrangement with the beneficial owner.

The agency provisions set out in section 177 of the Act will apply in situations where the agency relationship between the bare trustee and the beneficial owner is not disclosed to third parties.

For purposes of the GST, where a transaction is made by the trustee as an undisclosed agent, the beneficial owner, as principal, will be liable for the collection and remittance of the tax on the deemed supply to the agent while the agent's GST liability will be in respect of the deemed supply to a third party.

Each beneficial owner, who is a registrant, would then be liable for the collection and remittance of GST, filing returns, etc. to the extent of their ownership in the trust.

In the presence of a bare trust with several beneficiaries, it may be possible for them to elect one of the beneficiaries to be responsible for accounting for the tax in respect of the property under the joint venture election pursuant to section 273.

Claiming of ITCs

Pursuant to section 169 of the Act, a registrant will be entitled to claim ITCs for tax paid or payable on the inputs to be consumed, used, or supplied in the course of commercial activities.

In a trust situation, the person whose commercial activities the inputs relate to will be entitled to claim ITCs. As mentioned above, in a bare trust situation, the trust will not be entitled to claim ITCs.

The beneficial owner will claim ITCs for GST on expenses relating to their commercial activities (e.g. if the trustee incurred expenses as their agent).

The trustee of a trust would be the one to claim ITCs for the trust where tax has been paid by the trustee in respect of commercial activities of the trust.

Transfer of Title to and from the Trustee

Sections 268 and 269 of the Act provide that where a person settles property in an inter-vivos trust and where the trustee distributes property of the trust to the beneficiaries, the settling or distribution of the property is deemed to be a supply for consideration equal to the amount determined under the Income Tax Act.

These legislative provisions are of general application to all trusts and make the transfer of the title from the beneficial owner to the trustee a taxable supply for purposes of GST. The same treatment will apply when the title to the trust property is transferred to the beneficial owner.

In a bare trust situation, paragraph 54 (c)(v) of the Income Tax Act specifically excludes the transfer of legal ownership of the property held in trust without any change in the beneficial ownership from being a disposition of property.

However, sections 268 and 269 of the Act provide that for GST purposes, there will be a supply when any property, including the legal estate, is settled with a trustee or distributed to beneficiaries. Nevertheless, since the transfer of title only would be for nil or nominal value, no GST would be payable on the transfer of the legal estate in or out of the bare trust where the beneficial estate remains unchanged.

Registration and Deregistration Issues in Relation to the Administrative Position on Bare Trusts

In view of the above policy on bare trusts and who is engaged in a commercial activity in respect of trust property, it may be that a person would have to register or deregister for GST purposes.

This policy statement will be effective as of January 1, 1991. Persons affected by the policy will have until January 1, 1993 to make the appropriate changes pertaining to registration.

In a bare trust situation, the beneficial owner will be required to register and to account for GST in respect of supplies relating to the property held in a bare trust and will have until January 1, 1993 to do so. Similarly, a bare trust that is currently registered and accounting for tax in respect of supplies relating to the property held in a bare trust, may apply for cancellation of the registration. Such a cancellation would be effective on the same day that the beneficial owner is registered.
The Minister has, pursuant to subsection 242(1) of the Act, discretion to cancel a registration.

Becoming or Ceasing to be a Registrant

The provisions on becoming and ceasing to be a registrant will not be applicable when the beneficial owner registers and the bare trust deregisters. There is no transfer of property via a disposition or acquisition because there is no change in legal or equitable title to trust property, merely a change in who is considered to be engaged in a commercial activity in respect of the property for purposes of the Act.

Change in Use

The registration/deregistration will not generally affect the use of the property held in a bare trust.

However, a change in use may occur where the beneficial owner of the property held in a bare trust is engaged in exempt activities and the bare trust was engaged exclusively in commercial activities.