I remember the first time I heard the term bare trust and had no inkling of what it meant. For simplicity, a trust is defined as a person under subsection 123(1) of the Excise Tax Act. A bare trust is a trust that holds the legal title to property and whose only responsibility is to convey legal title to the beneficial owner on demand, or to act upon the beneficial owner’s instructions. That property may be split into legal and beneficial ownership may come as a surprise to many but it’s very common in real property. While there are many reasons a person may employ a bare trust to hold legal title to a property, there is one scenario where it is required and that is where a partnership has ostensibly acquired real property but cannot hold legal title under any province of Canada.
Imagine this scenario, a partnership is formed with the intention of acquiring farmland for the purposes of operating a farming business. As the partnership cannot hold legal title to the property under any provincial property laws, the partners acquire the legal title in their own names and use the partnership’s GST/HST number to self assess the tax under subsection 228(4). A year or two later an auditor looks at the transaction and sees that the legal title of the property is held under the names of the individual partners and finds no bare trust agreement entered into by the partnership to hold beneficial ownership, and the input tax credits (ITCs) are denied, resulting in large amounts of tax owing plus penalties and interest owed by the partnership for claiming ITCs it wasn’t entitled to. The issue in this case is not that the partners did not acquire the property in the course of the partnership’s activities, section 272.1 deems that to be so. The issue is that the documentary requirements under 169(4) have not been met and therefore the partnership is not entitled to the claimed ITCs. The question of whether this mistake can be undone upon appeal is unknown as I haven’t seen it in practice, but this is an example of one of the possible GST/HST pitfalls that very few business owners or tax professionals would be aware of. If you have an unusual real property situation take the time to consult with a ZheroTax GST/HST expert to get some guidance on the tax implications before entering into the purchase and sale agreement. For more information in respect of Bare Trusts and the GST/HST, see the publication Treatment of Bare Trusts under the Excise Tax Act.