Canada: No GST/HST New Housing Rebate Where a Bare Trustee Takes Title

Last Updated: April 10 2018

A Split Federal Court of Appeal Denies GST/HST New Housing Rebate Where a Bare Trustee Takes Title: The Queen v Cheema, 2018 FCA 45

Introduction - The Queen v Cheema

On February 27, 2018, a majority of the Federal Court of Appeal overturned the Tax Court of Canada and decided that a new-home purchaser cannot claim the GST/HST New Housing Rebate if a co-signer of the purchase agreement doesn’t satisfy the rebate conditions—even if the co-signer held title as a bare trustee for the purchaser’s benefit.

This decision—Her Majesty the Queen v Mohammad N. Cheema, 2018 FCA 45—stands in sharp contrast to the treatment of bare trusts in Canadian tax law, which generally considers such a trust a non-entity for tax purposes.

After explaining both the requirements of the GST/HST New Housing Rebate and the nature of a bare trust, this article explores the decision of the Tax Court of Canada in Cheema v the Queen (2016 TCC 251) and the decision of the Federal Court of Appeal in the Queen v Cheema (2018 FCA 45).

The GST/HST New Housing Rebate Under 254(2) of the Excise Tax Act

Section 256.1 of Canada’s Excise Tax Act (along with the provincial regulations) provides a new housing rebate of up to $24,000 for a residential complex in Ontario. In Ontario, the rebate’s availability does not depend on the value of the home. The federal rebate, however, is available only if the fair market value of the newly built or substantially renovated home is $450,000 or less.

Subsection 254(2) of the Excise Tax Act sets out the prerequisites for receiving the new housing rebate. In sum, all of these conditions must be satisfied for the purchaser to receive the new housing rebate:

  • A builder of a home or condo “makes a taxable supply” by selling the home or condo to a “particular individual.”
  • The particular individual is acquiring the home or condo as his or her “primary place of residence” (or the primary place of residence of his or her relative or spouse). Moreover, the particular individual must acquire the home or condo as a primary place of residence “at the time the particular individual becomes liable or assumes liability under an agreement of purchase and sale.”
  • The particular individual “has paid all tax [i.e., GST/HST] payable” for purchasing the new home or condo.
  • Ownership of the home or condo is transferred to the particular individual after the home or condo’s construction or substantial renovation.
  • The particular individual (or his or her relative or spouse) was the first individual to occupy the home or condo as a place of residence after its construction or substantial renovation. And if there is more than one particular individual, all of them as a group must satisfy the occupancy requirements (subsection 262(3) of the Excise Tax Act).

What Is a Bare Trust?

Equity, a body of law developed in the English Court of Chancery and adopted by Canadian common law, distinguishes legal ownership from beneficial ownership. A person legally owns a property when his or her name is on title. The beneficial owner, in contrast, is “the real owner of property even though it is in someone else’s name”: Csak v Aumon (1990), 69 DLR (4th) 567 (Ont HCJ), at p. 570.

A trust depends upon this distinction between beneficial and legal ownership. A trust is a relationship between a trustee, a beneficiary, and a property: the trustee has legal ownership of the property; the beneficiary has beneficial ownership.

Typically, the creator or settlor of the trust will burden the trustee with some duty to maintain or manage the trust property in the beneficiary’s favour. For instance, the settlor might require the trustee to manage a large sum of money for a child beneficiary.

A bare trust, on the other hand, is a trust where the trustee holds property without any further duty other than to convey it to the beneficiary upon demand. In other words, the difference between a bare trust and an ordinary trust lies in the trustee’s power or discretion: “The distinguishing characteristic of the bare trust is that the trustee has no independent powers, discretions or responsibilities. His only responsibility is to carry out the instructions of his principals—the beneficiaries. If he does not have to accept instructions, if he has any significant independent powers or responsibilities, he is not a bare trustee”: Trident Holdings Ltd. v Danand Investments Ltd., 64 OR (2nd) 65 (Ont. CA).

Tax Treatment of the Bare Trust: A Non-Entity Akin to an Agent

Generally, tax law ignores a bare trust. Courts treat a bare trust as akin to an agency relationship. In an agency relationship, the agent deals with property on behalf of the principal. For tax purposes, however, the principal is considered to deal directly with the property. Likewise, in a bare trust, the beneficiary is treated as dealing directly with the trust property.

And, until the Federal Court of Appeal’s decision in Cheema, courts have faithfully ignored the legal interests of a bare trustee when determining the tax implications of a transaction. For instance, in De Mond Jr. v The Queen, [1999] 4 CTC 2007, Justice Lamarre (as she then was) explained that “[t]he existence of a bare trust will be disregarded for income tax purposes where the bare trustee holds property as a mere agent or for the beneficial owner.”

This view applies not only to income tax but also to transactions involving the Harmonized Sales Tax and Goods and Services Tax (HST/GST). That is, courts also ignore bare trusts when applying the provisions of the Excise Tax Act: S.E.R. Contracting Ltd. v The Queen, 2006 TCC 6 at para 12; City of Edmonton v The Queen, 2015 TCC 172 at para 56.

Granted, neither the Income Tax Act nor the Excise Tax Act define a “bare trust.” But subsection 104(1) of the Income Tax Act says that “a trust is deemed not to include an arrangement under which the trust can reasonably be considered to act as agent for all beneficiaries under the trust.” Commentators interpret this clause as Parliament’s way of confirming that the Income Tax Act’s trust provisions don’t apply to a bare trust.

The Voyage Home of Mohammad N. Cheema

Mr. Mohammad N. Cheema wished to purchase a newly built residential property. But he required help securing a mortgage. So, Mr. Cheema approached his friend, Dr. Akbari, for assistance. To this end, Mr. Cheema and Dr. Akbari both signed the agreement of purchase and sale with the builder.

Akbari signed the purchase agreement solely to assist Cheema obtain mortgage financing. The two of them understood that Akbari wouldn’t have any real interest in the property, pay any the house’s purchase price or expenses, or occupy the house as his primary residence.

On closing, Cheema and his spouse acquired an undivided 99% interest in the property, while Akbari acquired a 1% interest. The parties also signed a bare-trust agreement documenting the nature of their relationship. The agreement stated that

  • Cheema and his spouse were the beneficial owners of the property,
  • Akbari held his 1% interest in trust for the beneficial owners, and
  • Akbari would convey his interest on demand.

The Canada Revenue Agency (CRA) denied the taxpayer’s new-housing rebate on the basis that Akbari neither acquired the property as his primary residence nor occupied the residence on closing.

Cheema appealed the CRA’s reassessment to the Tax Court of Canada.

The dispute—in both the Tax Court of Canada and the Federal Court of Appeal—turned on a single issue:

  • Is an individual acquiring title as bare trustee a “particular individual” for the purposes of subsection 254(2) of the Excise Tax Act?

If so, the bare trustee must satisfy the GST/HST New Housing Rebate conditions. If not, only those acquiring beneficial ownership need to satisfy the GST/HST New Housing Rebate conditions.

The Tax Court’s Decision: Cheema v Her Majesty the Queen, 2016 TCC 251

Before the Tax Court of Canada, Cheema argued that Akbari wasn’t a “particular individual” for the purposes of subsection 254(2) of the Excise Tax Act because Akbari was a bare trustee. Thus, Akbari need not satisfy the prerequisites for the GST/HST New Housing Rebate. Moreover, Cheema claimed that he alone was the “particular individual” who needed to satisfy the conditions in subsection 254(2).

The Crown didn’t dispute the fact that Cheema and his spouse satisfied the rebate conditions. But the Crown contended that Akbari needed to satisfy those conditions as well. The Crown alleged that Akbari was a “particular individual” because he signed the agreement of purchase and sale. Since Akbari didn’t occupy the property, the rebate is unavailable.

The Tax Court of Canada allowed Cheema’s appeal, permitting the rebate. The court found, on the basis of the bare-trust agreement, that Akbari was a bare trustee. It reasoned that a bare trustee is not a “particular individual” and thus need not meet the conditions set out in subsection 254(2) of the Excise Tax Act. In addition, the court held that subsection 262(3), which requires more than one “particular individual” to each qualify for the rebate, does not bring a bare trustee into the scope of 254(2). The court summarized the law as follows:

For tax purposes, a bare trust is considered a non-entity in the sense that a beneficiary as principal, is considered to deal directly with property through the trustee as agent or nominee (para 54).

The Crown appealed the court’s decision to the Federal Court of Appeal.

The Federal Court of Appeal’s Decision: Her Majesty the Queen v Cheema, 2018 FCA 45

The Federal Court of Appeal rendered a split decision. Stratas J.A. delivered the majority opinion; Nadon J.A. concurred. Webb J.A., however, produced a forceful dissent.

The majority appellate court sided with the Crown. In sum, the majority reasoned that the Tax Court erred by relying on the bare-trust agreement when rendering its decision. Recall, the Tax Court held that Dr. Akbari wasn’t a “particular individual” that needed to meet the rebate conditions under subsection 254(2): Akbari signed the purchase agreement but only acquired legal title as a bare trustee; Cheema was the beneficial owner. But, according to the majority Federal Court of Appeal, subsection 254(2) doesn’t distinguish between beneficial and legal ownership; it requires every individual assuming legal liability to the builder under the purchase agreement to satisfy the rebate conditions. In his robust dissent, Webb J.A. concluded that Akbari wasn’t a “particular individual” that must satisfy the rebate conditions subsection 254(2) of the Excise Tax Act. Webb J.A. reasoned that a “particular individual” is one who acquires beneficial ownership of the new home or condo; it’s not the individual that simply signs the agreement of purchase and sale. Webb J.A. observed that the GST/HST New Housing Rebate was presumably meant to aid the beneficial owner of a newly built home. After all, the beneficial owner is generally the person who pays the GST/HST on the purchase. Moreover, the rebate scheme doesn’t provide a means of identifying the “particular individual” when individuals are removed from the agreement of purchase and sale. This void, Webb J.A. suggested, indicated that the rebate conditions focused on the individual who acquired beneficial ownership—not merely the one who assumed liability under the purchase agreement. Finally, Webb J.A. anticipated cases where the majority’s judgment may in fact preclude the CRA from denying the GST/HST New Housing Rebate on the basis that a non-occupant acquired beneficial ownership but didn’t appear on the purchase agreement (ibid at para 62):

There may also be situations where the Minister will want to determine whether the supply by way of sale was made to the person who is the beneficial owner. Assume that two individuals want to buy a condo – one as an investment (the investor) and the other as a place to live (the occupant). Assume that the investor is not a relation of the occupant for the purposes of section 254 of the ETA. Assume that the occupant is the only person who signs the agreement of purchase and sale as a purchaser and is the only person shown on the deed as a grantee. The occupant collects one-half of the amount of the purchase price from the investor and pays the full purchase price to the builder. The occupant signs a declaration of bare trust in favour of the investor, declaring that a fifty interest [sic] in the property is being held for the investor. The occupant occupies the condo as their primary place of residence. It would seem to me that the Minister would want to argue that transfer of legal title by the builder to the occupant would not be sufficient to make the occupant the only particular individual for the purposes of paragraph 254(2)(a) of the ETA.

Despite Webb J.A.’s cogent reasons, the majority Federal Court of Appeal held that a taxpayer cannot receive the GST/HST New Housing Rebate if an individual signed the purchase agreement as a bare trustee yet failed to satisfy the rebate conditions under section 254 of the Excise Tax Act.

Commentary – Bare Trusts and the New Housing Rebate

As hinted by Webb J.A.’s dissent, the majority’s holding opens up an investment opportunity involving the GST/HST New Housing Rebate that Parliament presumably did not intend.

Moreover, the appellate court’s decision leaves a couple questions unanswered. First, Cheema involved a relationship between a bare trustee, Akbari, and a beneficiary, Cheema. The appellate court’s reasoning in Cheema would or should apply to principal-agent relationships. Second, in Cheema, Mr. Cheema and Dr. Akbari both initially signed the agreement of purchase and sale. The dissent pointed out that the GST/HST rebate provisions don’t provide a mechanism for recognizing a “particular individual” when a buyer’s name is removed from the purchase agreement. And the majority court doesn’t explain whether such a revision would render the GST/HST rebate unavailable for the remaining purchaser.

Tax Tips

Cheema demonstrates that, if you need a guarantor to qualify for a mortgage on a property otherwise eligible for the GST/HST New Housing Rebate, your guarantor should not sign the agreement of purchase and sale unless he or she meets the rebate criteria. If your intended guarantor doesn’t meet the rebate conditions, you should keep the guarantor’s name off title. Instead, your guarantor should only sign the mortgage agreement.

The Cheema case involved the GST/HST New Housing Rebate for purchasing a new home from a builder. But you can also receive the GST/HST New Housing Rebate for building a home on land that you own where the home will serve as your (or a relative’s) primary place of residence. Similarly, the GST/HST New Housing Rebate is also available if you substantially renovate your primary place of residence. The maximum Ontario new-housing-rebate amount for an owner-built house differs depending on whether you paid HST when you purchased the land: If you paid HST, the maximum rebate is $24,000; if you didn’t pay HST, the maximum rebate is $16,080.

The information is thought to be current to date of posting. Income tax law changes frequently and content may no longer reflect the current state of the law. This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Contact the Author?
Click here to email the Author
In Association with
In Partnership with
Other Canada Advice Centres
Competition and Antitrust
Mergers and Acquisitions
Labour and Employment
More Advice Centers
Useful Resources
Forms available to download for income tax filing in Canada.
Hear David J. Rotfleisch discuss timely and highly topical tax matters during appearances and interviews with specialist publications.
Useful explanatory videos of income tax matters.
The following questions and answers are based on the proposed measures that were announced on December 7, 2015.
The official Government website of the CRA.
This guide is for any person who deals with the Canada Revenue Agency (CRA). The guide gives you information on the 16 rights set out in the Taxpayer Bill of Rights and explains what you can do if you believe that the CRA has not respected your rights.
The Office of the Taxpayers' Ombudsman (OTO) works to enhance the Canada Revenue Agency's (CRA) accountability in its service to, and treatment of, taxpayers and benefit recipients through independent and impartial reviews of service-related complaints and systemic issues.
Ontario personal income tax is an annual tax collected from individuals who are Ontario residents on the last day of the tax year or have income earned in Ontario for the tax year.
The following documents provide instructions for filing your 2015 income tax return.
If you earned income in B.C. or operated a Corporation with a permanent establishment in B.C. last year you need to file an income tax return. Find out when you need to file your income tax return, and if any tax credits or rebates apply to you.
Generally, a corporation must file an Alberta corporate income tax return (AT1) for each taxation year during which it has a permanent establishment in Alberta.
Tools
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions