Recently, there has been increased Canada Revenue Agency (CRA) audit activity as it relates to bare trusts and GST/HST. It isn’t uncommon to see those involved with joint ventures to have the bare trustee registered for GST/HST and remitting the tax on behalf of all of the venturers. According to the CRA’s view on the role of the bare trustee, this type of arrangement may cause a potential GST/HST issue if the CRA were to audit the structure joint venture.
The CRA’s long standing position is that a bare trust is a non-entity for GST/HST purposes. As indicated in GST/HST Technical Information Bulletin B-068, the CRA’s commentary on a bare trustee is as follows:
The sole duty of a bare trustee will be to convey legal title to the trust property on demand by and according to the instructions of the beneficial owner. This would generally be provided for in the trust document or other documents establishing the trust. The bare trustee will 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.
Given the CRA does not view the bare trustee as being involved in commercial activities, this will impact who needs to register for and remit the GST/HST:
Where a trust is viewed by the (CRA) as a bare trust, all powers and responsibilities to manage and/or dispose of the trust property would be reserved to the beneficial owner. As a result, the beneficial owner, rather than the bare trust, would be involved in commercial activities relating to the trust property. Unless the beneficial owner qualifies for small supplier status pursuant to section 148 of the Act, or under one of the exceptions listed in subsection 240(1) of the Act, registration for purposes of the GST would be required. Where there is more than one beneficial owner within the trust arrangement, the small supplier’s threshold will be calculated on an individual basis, each beneficial owner being a separate person under the Act, unless the beneficial owners are associated persons for purposes of the Act.
Where this can also impact your real estate venture is when you have multiple venturers. Under the Excise Tax Act (ETA), a joint venture election can be made to allow the operator of the joint venture to handle all of the GST/HST requirements. Without the election, each participant in the venture would have to account for its share of GST/HST collected. Thus, it’s common to ease the administrative burden of the venturers by having the operator file the election.
To be eligible for the election, the operator is required to be a participant in the joint venture. If the operator does not have an investment in the venture, than this person must have “operational or managerial control” of the venture to qualify. As indicated above, the CRA does not believe that a bare trustee is a participant in the venture, as it does nothing more than hold title to the property. As a result, if your structure has a bare trustee corporation remitting the GST/HST on behalf of the venture, and it legally has no other involvement in the venture other than to hold title, you may be at risk. The CRA could view the joint venture election not to be a valid election, since section 273 of the ETA requires the operator to be a registrant. In order to be a registrant for GST/HST purposes, you are required to be involved in commercial activities, which the CRA views a bare trustee corporation not to be involved (although there could be some exceptions such as a trustee is registered and is named the operator, thus being responsible for control of the joint venture.)
If you are involved in a structure that has the bare trustee corporation registered and remitting the GST/HST for the venture, we would be pleased to review your structure and advise on the best course of action to correct. Recently, the CRA stated at the 2013 CICA Commodity Tax Symposium, that where they encounter a structure with a bare trustee remitting the GST/HST on behalf of the joint venture, as long as the correct tax has been remitted to the CRA as a whole, they would not reassess, but would require the structure to be revised on a go-forward basis. That being said, that is only a current CRA administrative position, and to ensure you are fully protected, filing a voluntary disclosure should be considered as it can help alleviate any penalties that may be associated the incorrect GST/HST filings.Written by: Gregory Sawatsky, MAcc, CPA, CA