The HST Blog : Canada Harmonized Sales Tax Lawyer Cyndee Todgham Cherniak for Assessments, PST & RST Issues in Ontario, British Columbia & Quebec

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It has been the Canada Revenue Agency's position for a long time (since 1993) that a bare trust should not register for GST/HST purposes.  Instead, the beneficiary or beneficiaries should register for GST/HST purposes.

This CRA's position is set out Technical Information Bulletin TIB-068 "Bare Trusts". The CRA believes the following:

• 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, responsibilities to carry out, or powers to exercise as trustee of the trust property;
• 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(s);
• the bare trustee does not have any independent power, discretion or responsibility pertaining to the trust property;
• someone other than the bare trustee controls the property, carries on the commercial activity that relates to the property, and is the "real owner" of the property;
• the person or persons with the real ownership of the property may be a "beneficiary", or a "settlor" under trust law;

The CRA states the following administrative policy:

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.

....

[I]n a bare trust situation, since the beneficial owners are considered to be engaged in the commercial activities relating to the trust property, they would be required to account for the GST to the extent of their share of the trust property, to file GST returns, and generally to comply with the obligations placed on registrants under the Act.

Many real estate transactions involve bare trusts.  Those who not aware of the CRA's position likely have made a structuring mistake.  These mistakes may be corrected by way of a voluntary disclosure.

I have been involved in many real estate acquisition transactions and rental activities in which the beneficial owners of real property want to hide their identity from the world at large.  This becomes complicated despite reasonable reasons for hiding.  For example, many years ago, a client knew that the sellers of a desirable piece of real estate would not sell to my client (for all the wrong reasons) and wanted to purchase the property using a bare trust. 

The issue for the CRA is that the bare trust has nothing.  As a result, if GST/HST mistakes are made, it is difficult to assess the GST/HST owed to the government.  Since bare trusts are often used in the context of real property, the property at issue involves greater amounts of GST/HST. 

When a professional looks at the competing interests, the middle ground shows up as a small area.  There are solutions to this problem in many cases if and only if the beneficial owner is not too demanding.  That being said, if the bare trust registers for GST/HST purposes, the CRA may conduct an audit and issue an assessment.  Their policy is clearly stated in TIB-068.  The policy is restated in many other GST/HST memorandum on real property.  "I did not know the law" is not an acceptable excuse.